SEGA SAMMY HOLDINGS Integrated Report 2018

Transcription

1 SEGA SAMMY HOLDINGS Integrated Report 2018

2 SEGA SAMMY HOLDINGS CONTENTS Statutory Disclosure Supplement The Japanese version of the report for the fiscal year under review does not include financial statements. For detailed financial information, please use the link below. printing_yuhou.html 1 Integrating Our Strengths 2 A Lineage of Innovative DNA 4 Innovative DNA 8 Financial Foundations 9 Business Portfolio 10 Integrating Our Strength through Unity 12 The SEGA SAMMY Group s Model for Creating Moving Experiences 14 A Message from the CEO 16 A Message from the COO 22 The SEGA SAMMY Group: Past and Present 22 Reforming Tirelessly to Overcome Adverse Conditions 24 Business Trends 26 Operating Data 27 Shareholder Value 28 Financial Data 30 IP Portfolio 32 A Bird s-eye View of the SEGA SAMMY Group 34 The Business Models of Main Business Segments 36 The SEGA SAMMY Group Going Forward 36 The Business Environment Surrounding the SEGA SAMMY Group 38 Group Strategy Road to Road Map to Corporate Value Enhancement 42 A Message from the CFO 44 Special Topics 44 Special Topic 1: Overcoming Adversity in the Pachislot and Pachinko Machines Business 48 Special Topic 2: SEGA s World-Class Creativity 52 Business Strategy 52 Pachislot and Pachinko Machines Business 56 Entertainment Contents Business 62 Resort Business 65 ESG 66 Toward Sustainable Growth in Corporate Value 68 Human Resource Strategy 70 Work-Style Reforms (Examples of initiatives related to the seven themes) 72 ESG Risks and Responses in the Value Chain 74 Social Factors 76 Environmental Factors 78 Social Contributions 79 Non-Financial Data 80 Corporate Governance 80 Corporate Governance 86 Directors, Audit and Supervisory Board Members, and Executive Officers 89 Financials 90 Management s Discussion and Analysis 95 Company Profile / Stock Information 96 Consolidated Balance Sheets 98 Consolidated Statements of Income and Comprehensive Income 99 Consolidated Statements of Changes in Net Assets 101 Consolidated Statements of Cash Flows 103 Notes to Consolidated Financial Statements 136 Independent Auditor s Report Cautionary Statement with Respect to Forward-Looking Statements Statements in this integrated report regarding the plans, estimates, beliefs, management strategies, perceptions, and other aspects of SEGA SAMMY HOLDINGS INC. ( the Company ) and SEGA SAMMY Group Companies ( the Group ), including SEGA CORPORATION and Sammy Corporation, are forward-looking statements based on the information currently available to the Company. Forward-looking statements include, but are not limited to, those statements using words such as believe, expect, plans, strategy, prospects, forecast, estimate, project, anticipate, aim, may, and might, and words of similar meaning in connection with a discussion of future operations, financial performance, events, or conditions. From time to time, oral or written forward-looking statements may also be included in other materials released to the public. These statements are based on management s assumptions and beliefs in light of the information currently available to management. The Company cautions you that a number of important risks and uncertainties could cause actual results to differ materially from those discussed in the forward-looking statements, and therefore you should not place undue reliance on them. You also should not assume that the Company has any obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. The Company disclaims any such obligation. Actual results may vary significantly from the Company s forecasts due to various factors. Factors that could influence actual results include, but are not limited to, economic conditions, especially trends in consumer spending, as well as currency exchange rate fluctuations, changes in laws and government systems, pressure from competitors pricing and product strategies, declines in the marketability of the Group s existing and new products, disruptions to production, violations of the Group s intellectual property rights, rapid advances in technology, and unfavorable verdicts in major litigation. [This integrated report includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.] Cautionary Statement for Investors and Shareholders with Respect to Nevada Gaming Statutes and Regulations SEGA SAMMY HOLDINGS INC. ( the Company ) is registered with the Nevada Commission as a publicly traded corporation and has been found suitable to directly or indirectly own the stock of SEGA SAMMY CREATION INC., and Sega Sammy Creation USA, Inc., both of which are subsidiaries that have been licensed as manufacturers and distributors of gaming devices in Nevada. Pursuant to Nevada law, the Company s shareholders are subject to the rules and regulations of the Nevada Gaming Authorities. A detailed explanation of Nevada gaming statutes and regulations can be found on the Company s corporate website:

3 INTEGRATED REPORT 2018 INTEGRATING OUR STRENGTHS The mission of the SEGA SAMMY Group which is also its reason for existence calls on the Group to focus on continuing to create moving experiences and making life more colorful. We will realize this mission and sustain growth in corporate value by further improving and combining our strengths. These include the innovative DNA that SEGA and Sammy have passed down over successive generations, robust financial foundations, and a balanced business portfolio established through management integration. 1

4 Integrating Our Strengths A Lineage of SEGA While SEGA has brought the world completely unique offerings, Sammy has incorporated leading-edge technologies to give the world mold-breaking gameplay. Created through the management integration of the two companies, the SEGA SAMMY Group has fused these two different creative talents to develop innovative DNA that is a distinctive strength SEGA Incorporated 1960 Japan 1st 1995 World 1st Developed first domestically produced jukebox, SEGA 1000 First used as an abbreviation of Service Games, the name of the company s predecessor, SEGA later became the official company name. Launched Print Club with ATLUS. CO., LTD. This was the first amusement machine that allowed users to take photographs and print stickers based on them. Many similar machines appeared on the market. Mainly gaining popularity among young women, the machines became a social phenomenon. Print Club SEGA 1975 Sammy Established 1993 World 1st SEGA 1000 SEGA 1979 Industry 1st Launched jankyu machine incorporating a television monitor, TV JANQ Sammy was the first company to incorporate monitors in jankyu machines, which combine mahjong and pachinko gameplay. Virtua Fighter SEGA Launched world s first 3D computer graphics (CG) fighting game for an amusement machine, Virtua Fighter The first Virtua Fighter was an amusement machine. A version of the game for SEGA s home video game console, SEGA Saturn, became a major hit Industry 1st 1985 World 1st Launched UFO CATCHER A crane game in which players operate a crane to capture prizes, the product s name derives from the crane s resemblance to a UFO. Launched single-bonus hitter pachislot machine, ALADDIN As the industry s first pachislot machine to include hitters with a high probability of paying out single-bonus jackpots, this product ignited a pachislot boom. UFO CATCHER SEGA 2 ALADDIN Sammy

5 INTEGRATED REPORT 2018 Innovative DNA 2008 New record 1997 Industry 1st Launched pachislot machine utilizing characters, Ultra Seven This model pioneered the incorporation of much-loved characters. Spreading throughout the industry, this strategy diversified gameplay and broadened the player base. Pachinko CR Hokuto No Ken 1983 Buronson & Tetsuo Hara NSP2007, Approved No. SAE-307 Sammy Launched pachinko machine, Pachinko CR Hokuto No Ken The first product marketed after transferring to a new development system, this title shipped more than 260,000 units, breaking our in-house record for pachinko machine unit sales Dreamcast SEGA 1999 Industry 1st Launched pachislot machine incorporating an LCD, GeGeGe No Kitaro Sammy was the first to incorporate liquid cristal displays (LCDs) into pachislot machines. LCDs are now indispensable for the images pachislot machines display World 1st Launched home video game console, Dreamcast As the world s first home video game console with Internet connectivity, this was a moldbreaker. However, it was our last such product because fiercer competition led us to withdraw from the home video game console area Industry 1st Launched first networked role-playing game (RPG) for a home video game console, PHANTASY STAR ONLINE Although online games for home video game consoles are common today, SEGA created Japan s first such game. We have released versions of the game for many different platforms and established the title as a long seller. Pachislot Hokuto No Ken Buronson & Tetsuo Hara Sammy MUSHIKING: The King of Beetles SEGA SEGA SAMMY HOLDINGS Established New record Launched pachislot machine, Pachislot Hokuto No Ken Exemplifying Sammy s Always Proactive, Always Pioneering founding principle, this model featured a groundbreaking combination of gameplay, animation, and LCD images. The product s unit sales of more than 620,000 remains an unbroken record for a pachislot machine. Industry 1st Launched industry s first kids card game, MUSHIKING: The King of Beetles A mega-hit among boys in the lower grades of elementary school, this game established kids card games as a new market. 3

6 SEGA SAMMY HOLDINGS Strength Innovative DNA The heads of development at Sammy and SEGA discuss how the Group is continuing to evolve through the resonance and fusion of the innovative DNA of SEGA and Sammy. Director, Chief Product Officer of Entertainment Content HQ, SEGA Games Co., Ltd. Director, Chief Product Officer, SEGA Interactive Co., Ltd. Toshihiro Nagoshi PROFILE Joined the former SEGA CORPORATION in 1998; creator of the Ryu ga Gotoku series, which has shipped more than 11 million units worldwide Having a Common Innovative Approach to Creation Ryu ga Gotoku 6: Inochi no Uta SEGA Nagoshi When I joined the former SEGA CORPORATION, amusement machines were the center of attraction. Companies that had made an early start were focusing efforts on ambitious initiatives to develop home video game consoles. We struggled to catch up with these companies. And, in the end, we withdrew from hardware. However, since then, one thing that has not changed at all is that SEGA places a great deal of trust in employees. The fundamental task of marketing is to seek overlaps between customer demand and the type of products we want to offer. More than anything, however, SEGA sets store in the passion of its creators. Through its products, the company has delivered creators innovative ideas to 4

7 INTEGRATED REPORT 2018 Executive Vice President (Representative Director) Managing Director of Research & Development Group Division and Development Promotion Division, Sammy Corporation Ayumu Hoshino PROFILE Joined Sammy Corporation in 1995; directs planning and development of the Pachislot Hokuto No Ken, which holds the No.1 cumulative sales record in the histry of pachislot machines, with sales that have surpassed 620,000 units Pachislot Hokuto No Ken Shindensetsu souzou Buronson & Tetsuo Hara/NSP 1983, NSP 2007 Approved No.YBJ-918 Sammy the world without adulteration. Therefore, I think this innovativeness has earned SEGA a unique reputation in that sets it apart from peers. Similarly, our Sales and Marketing Department takes pride in this innovativeness. While this approach has benefits, it also has risks. I think Sammy Corporation also has this dedication to the pursuit of attributes that other companies cannot match. Hoshino I agree. Sammy has the same kind of respect for innovativeness. About 20 years ago, the company was really only a third or fourth class manufacturer. Unable to compete with the brand power of major manufacturers, we focused on how we could draw attention to our products. As a result, we came to the conclusion that if we included a host of industry-first functions, people would at the very least take an interest in our products. This was before we even had our current Sammy the wellspring of new ideas slogan. Because we were always looking to incorporate some sort of new functions or gameplay, we often had setbacks. But it is precisely the experience of working with the attitude that it is enough if 30% of new machine models become hit products that has given employees a deeply rooted pioneering mindset. There have been times when I have felt that we were moving forward a little too quickly, but I think SEGA is the same. Nagoshi Without question, SEGA has also built its reputation precisely because it has always strode ahead of other companies. For example, we launched the industry s first RPG with network compatibility, PHANTASY STAR ONLINE, at a time when broadband penetration was almost non-existent. When we realize a daring idea, it certainly causes a great deal of surprise. On the other hand, there is also the risk of a project ending up as pie in the sky. I think that our perseverance in refining these types of ambitious projects has enabled us to create progressive products that overwhelm the offerings of competitors and earn strong long-term endorsement from a large player base. I also feel that when we push the envelope in our work, benefits invariably emerge afterwards. Ryu ga Gotoku is a product that exemplifies this. At university, I studied movies. I was very 5

8 SEGA SAMMY HOLDINGS puzzled by the fact that people would go to see a movie because it starred a famous actor or actress, but there was no video game that applied an equivalent model. When I began thinking that it would be interesting if an actor starred in a video game in the way that actors star in movies and TV dramas, I was sowing the seeds that grew into the concept for Ryu ga Gotoku. I expected that competitors would roll out titles based on similar concepts. In the end, however, they did not create any enduring products. In the past, competitors mentioned that they had no intention of creating such products because they would not be able to catch up with Ryu ga Gotoku, and these comments made an impression on me. I believe that we have established this position thanks to our creative team and by always adopting a forwardlooking stance and continuing to evolve. The unit sales of Ryu ga Gotoku overseas were only around several 10s of thousand until not that long ago. Recently, however, overseas unit sales have begun to increase as the product s reputation builds. The appeal of the product, which is the fruit of thoroughgoing efforts in Japan, is spreading over time. Creators have devoted a lot of energy to realizing this appeal, and I think players sense this and take an interest in the video game. Looking back, I have a real sense of personal growth as a result of working on the project, which allows me to serve as an example for following employee. I think this is the process by which the next generation inherits innovative DNA. Hoshino The importance of maintaining a proactive mindset is equally true when it comes to applying for the approval of newformat machines. Due to the February 2018 regulatory revision, manufacturers are submitting products for prototype testing based on new regulations. Normally, manufacturers might initially submit a machine with safer specifications to acquire approval, and then steadily submit machines with more ambitious specifications. On the other hand, unafraid of the possibility of failing to acquire approval, Sammy pursues appealing machines and submits them for testing without compromising on the specifications. SEGA and Sammy have similar approaches to their industries in the sense that they both value quality over speed in relation to development. At Sammy, our view is that postponing a launch until the next fiscal year is preferable to releasing a sketchy product. The real aim of our efforts to shorten development lead times under Road to 2020 is not to bring machines to market quickly. Instead, our aim is to use the time freed up through shortened development periods to rigorously refine machines. Product creation must not overemphasize reaching immediate numerical targets and end up just being about making the figures match up. We will not betray the expectations of customers who always want to play the best possible machines. If there is an aspect we stick to figures, I think it is important to bringing forward development lead times a little so that we can conduct repeated product trials on finished machines to refine them and make them as exciting as possible. Nagoshi I think we will have acquired the basic strength to respond to changes when we are able to reconcile contradictory aims and say We will set aside time to increase the quality, but we must not miss the numerical targets. Previously, there have been times when, despite proceeding as planned, SEGA s projects have recorded deficits. I think a lack of change has been the problem at these time. Because the present management team favors change, instructions change on an almost daily basis. To be honest, frontline operations have undergone many changes as a result. Nonetheless, our figures have become much better. I think that continuing this type of change is needed to win out in today s volatile times. Production must not just be about making the figures match up. Ayumu Hoshino 6

9 INTEGRATED REPORT 2018 When we push the envelope in our work, benefits invariably emerge afterwards. Toshihiro Nagoshi Hoshino I also feel that in order to move forward, continuing to change is essential. At Sammy, as well as focusing on embracing change to create quality products, our awareness of cost in relation to such strategies as reusing and recycling components has increased considerably. The attitude of frontline employees has changed. Previously, we invested capital in products that developers wanted to create. Now, we pursue return on investment by differentiating between areas where we should invest capital and those where we should curb costs. At the same time, we focus on creating products that satisfy players. Nagoshi Under Road to 2020, SEGA is actively investing in intellectual properties (IP), including the creation of new IP and the revival of past IP. Revived IP are seeing some success. However, we should not forget that, in addition to long-standing fans, we have to reach current players. Having too much confidence in past successes and simply trying to duplicate them will not generate products that earn acceptance in today s environment. Setting our sights beyond 2020, I want to take an even more bullish, forward-focused approach to development and increase mainstay product lineup. With the integration of offices in the summer, this is a year of major changes for the SEGA SAMMY Group. Until now, we have worked with Sammy on various projects. However, we could never synchronize perfectly due to our physical separation. Therefore, I expect that the integration of our offices will activate exchanges of information and accelerate coordination. For SEGA employees engaged in product development, I think that being able to talk with Sammy s development personnel will be a great stimulus. Hoshino Yes, I think you are right. It will also be very stimulating for Sammy s employees. Opportunities for communication among personnel will increase as a result of there being less physical distance between them. For example, the new office has a dining area. Therefore, if personnel can share interesting ideas about creating products and come up with new innovations, perhaps over a drink, it could give rise to completely new development projects that would not have occurred to us under the previous system. In the med-to-long term, we want to establish an environment in which increased day-to-day exchanges enhance the mobility of personnel and lead more employees experience the diversity of the Group s personnel. Nagoshi Outside the Group, many people still see SEGA and Sammy as separate entities. I think the task for us going forward is to increase the occasions when we are viewed as a single entity under the SEGA SAMMY banner. I hope that the integration of our offices will further strengthen the Group s brand by enabling us to leverage the innovative DNA that each company has inherited and to align the values that underpin the SEGA SAMMY brand. 7

10 SEGA SAMMY HOLDINGS Strength Financial Foundations In the entertainment industry, where the absence or presence of hit products affects earnings significantly. Operating Margins of Major Entertainment Companies The SEGA SAMMY Group is engaged in hit product businesses, which require continuous investment in development to create hit products and in which hit products, or their absence, affect earnings significantly. The Group is able to prosper in this environment because its financial stability and the Pachislot and Pachinko Machine Business segment s cash generation capabilities enable continuous investment to develop new products and support strategic investments in the long term, such as Resort Business SEGA SAMMY Company A (pachinko and pachislot machines) Company B (game content) Company C (game content) Equity Ratio % (FY) 65.0% (FYE) The Group s robust financial foundations are a competitive advantage because they enables stable investment in development. R&D Expenses, Content Production Expenses* / Capital Expenditures of the Resort Business Billions of yen New Segments (FY) Pachislot and Pachinko Machines Business Amusement Machine Sales Business (area) Amusement Center Operations (area) Consumer Business Entertainment Contents Business Resort Business Capital Expenditures of the Resort Business * The aggregate calculation method has changed as of fiscal Consequently, R&D expenses and content production expenses include amortization cost of digital game titles. Until fiscal 2013, depreciation and amortization included amortization cost of digital game titles. SEGA 8

11 INTEGRATED REPORT 2018 Strength Business Portfolio Through management integration, we have built a business portfolio that encompasses an extensive range of entertainment fields. By heightening our ability to withstand fluctuations in business environment and creating an array of profit opportunities, this portfolio underpins the sustained growth of corporate value. 3% Resort complex Packaged games Digital games Resort Business 33% Amusement center operations Amusement machine sales Balanced business portfolio that stabilizes earnings and produces diverse profit opportunities Pachislot machines 64% Entertainment Contents Business Animation and toys Net Sales Composition (Fiscal 2018) Pachinko machines Pachislot and Pachinko Machines Business A Balanced Business Portfolio That Reduces the Effect of Fluctuations in Business Environment The SEGA SAMMY Group operates businesses across a broad range of entertainment fields. These include operations focused on pachislot and pachinko machines, video game contents such as digital games and packaged games, amusement arcade machines, amusement center operations, animation and toys, and resorts. With its balanced mix of entertainment fields, this business portfolio is an advantage in sustaining the growth of the Group s corporate value. In recent years player s playing options have been increasing. For example, they can use amusement centers or smartphone apps. As a result, competition to attract players has been intensifying in the entertainment field. The extensive business portfolio of the SEGA SAMMY Group enables it to develop profit opportunities even as business environment change. Moreover, our portfolio structure disperses environmental fluctuation risk, thereby ensuring the stability of our earnings and investment. In addition, the business portfolio helps increase asset efficiency by allowing the Group to make effective use of a single IP in multiple businesses. We leverage this attribute through multi-channel IP rollouts ( P.57) that encompass mobile games, games for home video game consoles, PC games, and amusement machines. 9

12 SEGA SAMMY HOLDINGS INTEGRATING OUR STRENGTHS THROUGH The Group will come together to continue creating moving experiences. Innovative DNA Financial Foundations Business Portfolio Human Capital 10

13 INTEGRATED REPORT 2018 More than 10 years have passed since the management integration of SEGA and Sammy. During this time, business conditions have changed markedly. Against this backdrop, the SEGA SAMMY Group has renewed its brand logo to symbolize the Group s direction going forward. Sharing the commitment that this new brand logo encapsulates, the Group s employees are making a concerted effort to advance strategies based on the Road to 2020, which covers fiscal 2018 through fiscal

14 SEGA SAMMY HOLDINGS The SEGA SAMMY Group s Model for Creating Moving Experiences Sustaining Corporate Value Growth by Creating Moving Experiences Management Resources that are Strengthened and Utilized Continually Intellectual Property Capital Human Capital Customers Social Capital Natural Capital While always aware of the need to produce favorable short-term results, the SEGA SAMMY Group conducts business management that is focused on enhancing long-term corporate value. Our aim is to constantly increase corporate value by continuing to create moving experiences with value that surpasses customers expectations, establishing environments that enable personnel to take maximum advantage of their talents, and fulfilling our social mission as an entertainment company. Value Creation from the Viewpoint of Shareholder Value By raising profitability through the provision of added value that goes beyond customers expectations and by fulfilling our social responsibility as an entertainment company, we will increase capital productivity and reduce capital cost. In this way by providing value to all stakeholders the Group will sustain corporate value enhancement over the long term. Non-Financial Capital Creates moving experiences Intellectual Property Capital Human Capital Social Capital Financial Foundations Competitive Advantages Innovative DNA Financial Foundations Business Portfolio Added value for customers + Reduced capital cost Surpassing society s expectations (fulfilling social responsibility as an entertainment company) Added value for shareholders 12

15 OUTCOME Surpass shareholders expectations (Increase financial value) We aim to realize an operating income margin of at least 15% and ROA* of at least 5% in fiscal * ROA = Profit attributable to owners of parent Total assets OUTCOME Surpass society s expectations (Preserves and increases corporate value) Our mainstay businesses are focused on making life more colorful by creating positives that outweigh negative aspects for society while taking sincere measures to address issues. INTEGRATED REPORT 2018 ESG (Environmental, social, and governance factors) Work-style reform aimed at promoting diversity Addiction countermeasures Cooperation with competitors and partners Lowering environmental burden and increasing profitability simultaneously Strengthening of monitoring and supervision of business management Mission Continuing to create moving experiences Making life more colorful Continuing a virtuous cycle that converts moving experiences into corporate value Corporate Strategies As well as concentrating the investment of cash from core businesses on growth businesses, we are advancing a portfolio strategy with a view to participating in the integrated resort business in Japan. ( P.16 A Message from the COO) Business Domain Pachislot and Pachinko Machines Business Entertainment Contents Business Resort Business OUTCOME Cultivates a sense of coherence and creates moving experiences (Surpass customers expectations) We will continue creating entertainment that surpasses customers expectations in a good way. 13

16 SEGA SAMMY HOLDINGS A Message from the CEO We will realize sustained long-term growth in corporate value by tirelessly taking on challenges based on long-term viewpoints. Hajime Satomi Chairman and Group CEO (Representative Director) SEGA SAMMY HOLDINGS INC. 14

17 INTEGRATED REPORT 2018 Business Management Based on Long-Term Viewpoints It is important to permit good failures and continue surpassing the market s expectations. I took up the challenge of amusement machine sales in 1965, when I was 23. My base was an office of just 79 square meters. Since then, I have always ventured into uncharted territory, and I have experienced many failures. I have reached my position today by reviewing such failures and then using the lessons learned from them in subsequent ventures. Without experiencing failure, people and companies cannot grow. Sammy s company credo, Always Proactive, Always Pioneering encapsulates this attitude. Similarly, Creation is Life the company credo of SEGA is imbued with the spirit of a pioneer, which the company has inherited from its foundation. The SEGA SAMMY Group, which was established through management integration with SEGA, maintains a culture that permits good failures, in other words a culture allowing failures that are the result of strenuous efforts to reach goals. When I am speaking to young personnel, I often urge them to hurry up and experience a good failure. I always make an effort to approach business management from medium-to-long-term viewpoints. This approach stems from lessons learned from those times when we have pursued nearterm business results overeagerly, introduced mediocre products or services, and damaged the carefully cultivated value of major IP as a result. Further, I believe this management stance is also necessary for permitting the good failures of our Group companies. I constantly tell employees that while reaching the fiscal year s targets is an important mission, providing products and services that significantly surpass the expectations of customers is more important. With this in mind, I have tried to set an example by rigorously checking products until I am convinced of their quality. Also, in the context of long-term business management, Road to 2020 (covering fiscal 2018 through fiscal 2020) shows the direction of new ambitions initiatives the Group should proceed. Concentration of Investment on Growth Businesses We will steadily strengthen and develop our growth drivers. We are positioning the Pachislot and Pachinko Machines Business and the packaged games, the amusement machine sales and the amusement center operations areas of the Entertainment Contents Business as core businesses that are not premised on sales growth and in which we will continually reform earnings structures with a view to realizing profit margin improvements and the stable generation of earnings. The Group s portfolio strategy is to invest the cash that these core businesses generate in growth businesses in a prioritized manner. We have positioned the digital game area as a medium-term growth driver, while we are developing the Resort Business as a third pillar from a long-term perspective. Through the Resort Business segment, we operate one of Japan s premier resort complexes, Phoenix Seagaia Resort, and South Korea s first integrated resort, PARADISE CITY, through a joint venture with the PARADISE GROUP of South Korea. We are also accumulating know-how through the operation and management of resorts with a view to participation in the integrated resort business in Japan. For the Creation of the Group s Future Integrated resorts will open up a wide range of possibilities for the Group. The enactment of the Act on the Establishment of Specified Integrated Resort Areas in July 2018 clarified the road map for the introduction of integrated resorts to Japan. After the selection of operators and areas, we expect that the realization of commercial operations will become possible around We believe that the introduction of integrated resorts to Japan has the potential to become a powerful tool for activating Japan s economy through the use of private-sector capital. Many companies have announced their intention to participate. However, I want the Group to hold the majority of projects and develop businesses in a broad range of fields with casino operations as the central focus. At present, we are laying the foundations for participation by accumulating knowhow through PARADISE CITY and other resorts, establishing financial resources, and conducting multifaceted investigation and analysis. If we can realize participation and build successful businesses, it will open up a wide range of possibilities for the Group going forward, including the expansion of businesses in the global market using the know-how gained from such successes. Through such ambitious initiatives, the future vision of the SEGA SAMMY Group is to become a corporate group that has a unique presence among global entertainment companies with respect to both revenue scale and business lines. I believe my mission is to meet the expectations of shareholders and all other stakeholders through the realization of this vision, and I will work unstintingly to realize it. As we take on new challenges, we would like to ask our stakeholders for their continued support. August 2018 Hajime Satomi Chairman and Group CEO (Representative Director) SEGA SAMMY HOLDINGS INC. 15

18 SEGA SAMMY HOLDINGS A Message from the COO Aiming to achieve Road to 2020 and the future vision of the Group beyond it, we will maintain a sound, far-sighted approach, even if this means taking a roundabout route. Haruki Satomi President and Group COO (Representative Director) SEGA SAMMY HOLDINGS INC. 16

19 INTEGRATED REPORT 2018 The Spirit within Our Mission Provide Society with Positives That Outweigh Negatives Aiming to realize its long-term vision ( P. 39), the SEGA SAMMY Group is advancing the Road to 2020 initiative, which maps out the Group s direction through fiscal In conjunction with these efforts, we are changing our mindset and motivating each employee to execute their action plans by embedding strategies into a mission pyramid that has value (mindset / DNA) at its pinnacle. Before reporting the progress of Road to 2020, I would like to explain the spirit I embedded into the mission (raison d être) of the mission pyramid. Through their mainstay businesses, companies are expected to help address a range of social issues, such as the shared global issues on which the Sustainable Development Goals (SDGs) focus. Our mainstream business is entertainment. I believe that, rather than simply providing products and services, the essence of entertainment lies in continuing to surpass customers expectations. In other words, we should concentrate on continuing to provide greater-than-expected value. One intent is the belief that the mission of continuing to create moving experiences represents the value we should provide. In fact, the mission also includes another message directed at employees. Mission Pyramid Value (Mindset / DNA) Creation is Life Always Proactive, Always Pioneering Mission (Raison d être) Vision (Ideal self) Pachislot and Pachinko Machines Sammy the wellspring of new ideas as an innovator in the industry Goal (Specific target) Operating income margin: At least 30%* 2 Continuing to create moving experiences Making life more colorful Be a Game Changer Entertainment Contents Be a Game Changer Operating income margin: At least 15% ROA* 1 : At least 5% Sales: At least billion Operating income: At least 30.0 billion Operating income margin: At least 10% Resort Be an Experiential Innovator Succeed in IR businesses Enhance brand value *1 ROA = Profit attributable to owners of parent Total assets *2 Operating income margin of the Pachislot and Pachinko Machines Business excluding other and eliminations The entertainment industry has both positive and negative effects on society. One example was our experience following the Great East Japan Earthquake in March At the time, criticism was directed at pachinko halls, amusement centers, and other entertainment facilities based on the large amounts of electricity they were consuming while planned power outages were being implemented due to electricity shortages. This brought the reason for the existence of entertainment into question. Many of our employees were distressed and felt helpless, some of them even questioned the propriety of continuing to operate amusement centers during such a crisis. I recall the chairman sent out the message that we should do what we could do to lift people s spirits precisely because we were in such circumstances. Hearing this boosted the morale of employees who had begun to feel despondent. Of course, providing the utilities and goods essential for daily life is the first priority in a disaster. For true restoration, however, vitality for tomorrow is essential, and I believe that this is something entertainment can provide. Meanwhile, the entertainment industry must tackle potentially negative aspects head on. These include the influence of video games on children and addiction to playing pachinko and pachislot machines. I am convinced that society will continue to value us if we continue delivering positive excitement that outweighs such negative aspects. The subtitle of the mission, making life more colorful, includes this belief. I want our employees to always take pride in providing society with bright colors that outshine black, grey, and other dark colors. Fiscal 2018 Performance Report Progressed Steadily under Road to 2020 Despite Missing Targets Road to 2020 sets targets of at least 15% for the operating income margin and at least 5% for ROA in its final fiscal year, fiscal Also, the initiative calls for a steep increase in earnings in its third year, and we are steadily taking measures aimed at realizing these targets. ( P. 38 Group Strategy Road to 2020.) In fiscal 2018, the year ended March 31, 2018, and the initiative s first fiscal year, we fell short of initial targets and recorded year-on-year declines of 11% in net sales and 40% in operating income. In the Pachislot and Pachinko Machines Business, unit sales decreased due to major changes in the sales schedules of multiple titles in response to the enforcement of Rules for Partial Revision of Ordinance for Act on Control and Improvement of Amusement Business, etc., and Regulations for the Verification of Licenses, Formats, and Other Aspects of Pachislot and Pachinko Machines (regulatory revision) in February

20 SEGA SAMMY HOLDINGS Further, the Entertainment Contents Business marketed fewer titles than initially expected as a result of postponing the introduction of certain titles to the digital games area to fiscal On the other hand, the packaged games, amusement machine sales, and amusement center operations areas performed well, enabling the Entertainment Contents Business to surpass initial targets by a large margin. Although lower revenues and earnings from the Pachislot and Pachinko Machines Business resulted in a disappointing performance relative to targets, my overall evaluation of fiscal 2018 is that we made steady progress in relation to Road to Here, I would like to explain the basis of this evaluation. Progress under Road to 2020 Strategic Revision of the Release Schedule In the pachinko and pachislot machine industry, the regulatory revision enforced in February 2018 greatly reduced the gambling element of pachinko and pachislot machines, which is their distinctive feature. Meanwhile, in response to the regulatory revision industry, bodies changed their voluntary regulations. Particularly for pachislot machines, although the changes in the voluntary regulations have significantly lowered overall gambling element, the changes have also broadened the scope for gameplay. Consequently, we believe the potential exists to offer appealing pachislot machines. ( P.46 No. 6 Model Changed the Market Environment) Therefore, we determined that strategically revamping our pachislot machines based on the new regulations would allow us to offer products that match market demand going forward. As a result, we significantly revised our second-half release schedule. Thus, our product strategy in the second half of fiscal 2018 was based on a larger medium-term strategy. Also, we are making good progress with the measures of Road to 2020 aimed at improving the profit margin. These include initiatives at our joint venture with Universal Entertainment Corporation, ZEEG Co. Ltd.; cost improvements through component reuse. The Entertainment Contents Business outperformed initial targets and recorded earnings growth for the third consecutive fiscal year. In particular, we were in the black for the second straight fiscal year across all business areas and regions (Japan, other parts of Asia, North America, and Europe) for the first time, including the era of the former SEGA CORPORATION. I feel confident that our businesses are beginning to transition toward a favorable cycle based on a highly sustainable earnings structure that stably generates income without being dependent on one major hit product. The substantial growth of the packaged games area reflects increased sales in the global market as well as the progress of efforts under Road to 2020 aimed at creating a structure that advances global rollouts. Repeat sales of older titles have been rising robustly. For example, cumulative sales of Persona5, which we launched in April 2017, have surpassed 2.2 million units in Japan, North America, and Europe. This growth is proof that the product quality of our games is satisfying players worldwide and is, of course, a driver of profit margin improvement. The amusement machine sales and amusement center operations areas, which have seen an ongoing recovery in the scales of their markets for two consecutive fiscal years, are showing solid results. The amusement machine sales area is realizing adequate profitability thanks to brisk sales of prize game machines and to the introduction of a revenue-sharing business model, which provides continuous revenues. Also, the amusement center operations area is reaping the benefits of tireless efforts to strengthen operations. The revision of the release schedule in the digital games area also resulted from giving priority to improvement of product quality rather than to the fiscal year s sales figures. As I will explain later, our strategies will be more aggressive in this area in fiscal As for the Resort Business, April 2017 saw the opening of the first stage of phase 1 development of PARADISE CITY, South Korea s first integrated resort. PARADISE CITY is proving extremely popular, with more guests visiting from Japan than anticipated. PARADISE CITY PARADISE SEGASAMMY Co., Ltd. All rights reserved. On the other hand, some issues remain. An issue that applies to all of our businesses and business areas is the probability of success. If we breakdown results by title, hit titles are compensating for titles that do not meet targets. By repeatedly testing hypotheses, we intend to heighten the likelihood of success. Further, I view PHOENIX RESORT CO., LTD., which continues to recognize operating losses, as an important issue. 18

21 INTEGRATED REPORT 2018 Fiscal 2019 Targets Outperform Targets through the Pachislot and Pachinko Machines Business In fiscal 2019, the year ending March 31, 2019, we are targeting year-on-year increases of 20% in net sales, to 390 billion, and 18% in operating income, to 21 billion. We expect an operating income margin of 5.4%, essentially unchanged year on year. Also, we are planning to appropriate 7.5 billion for transfer expenses likely to arise from the consolidation of the head office functions of respective Group companies in stages beginning from August Excluding the effect of these one-off expenses, the actual target for operating income is year-on-year growth of 61%, to 28.5 billion. In the current fiscal year, mainly through contributions from the Pachislot and Pachinko Machines Business, we want to go beyond our targets. The Pachislot and Pachinko Machines Business aims to increase revenues 15% and earnings 55% year on year. We plan to steadily market new-format pachislot machines from the second half of the current fiscal year through fiscal I am very optimistic about the new-format pachislot machines. While curbing gambling elements in accordance with the essence of the regulatory revision, we will be able to broaden the scope of development based on the changes in voluntary regulations. Until now, it has required five or six hours to fully enjoy playing a pachislot machine. Competing for customers time with other forms of entertainment, playing time comparable with the time normally spent at a theme park has been a considerable disadvantage for pachislot machines. Going forward, however, it will become possible to get enough entertainment by playing pachislot machines for about two hours roughly the time needed for such pastimes as karaoke, movies, and bowling. As a result, pachislot machines will once again become a local, convenient form of entertainment, enabling us to capture demand for entertainment that occupies short periods of free time. As for pachinko machines, the fact that we have multiple old-format machines that have already acquired certifications of conformance with regulations is a major advantage. In fiscal 2019, we will focus sales strategy on old-format machines. At the same time, we will analyze trends among competitors with respect to new-format machines and develop new-format machines with our sights set on fiscal Launched in the current fiscal year, the old-format machine Pachinko CR Nisemonogatari has been meeting with high acclaim, recording favorable utilization rates, and receiving repeat sales orders. In the current fiscal year, we will also roll out Pachinko CR Shin Hokuto Muso Chapter 2 as the successor to the Pachinko CR Shin Hokuto Muso pachinko machine. Marketed in 2016, the latter pachinko machine has reached cumulative sales of more than 80,000 units and is still being utilized. Given that the new offering is the successor of a popular pachinko machine, I want to make sure that we advance sales efforts proactively. Pachinko CR Shin Hokuto Muso Chapter 2 Buronson & Tetsuo Hara/NSP 1983, Approved No. KOK Koei Tecmo Games Co., Ltd. Sammy Fiscal 2019 Targets Years ended / ending March 31 Billions of yen (Plan) Net sales Operating income Operating income margin 8.0% 5.5% 5.4% Ordinary income Income (loss) before income taxes Profit (loss) attributable to owners of parent ROA* 5.2% 1.8% * ROA = Profit attributable to owners of parent Total assets Operating income (Before consideration) One-off expenses of relocation Operating income (After consideration) Consolidated 28.5 (7.5) 21.0 Pachislot and Pachinko 20.1 (1.6) 18.5 Machines Entertainment Contents 18.5 (5.0) 13.5 Resort (3.0) 0.0 (3.0) Other / Eliminations (7.1) (0.9) (8.0) 19

22 SEGA SAMMY HOLDINGS Entertainment Contents Business Strategy Maximize IP Value and Accelerate Global Rollouts In the Entertainment Contents Business, we expect a 24% rise in revenues and a 9% decline in earnings year on year. The growth of earnings will be expected in the digital games area, which plans to launch 12 long-awaited titles. Similarly, the packaged games area is likely to see higher earnings thanks to increases in sales of new titles, sales in overseas markets, and repeat sales. Meanwhile, earnings from the amusement machine sales area, which will recognize the advance investment expenses of the casino machine area, and from the amusement center operations area will probably edge down. In the animation and toys area, we anticipate essentially unchanged earnings levels. Through multi-channel rollouts in the global market, the Entertainment Contents Business will focus on maximizing the value of its IP portfolio, including new IP, huge amount of existing, and dormant IP, and third-party IP. In the digital games area, April 2018 saw the release of SEGA Pocket Club Manager (commonly known in Japan as Sakatsuku), a new app for ios and Android that recreates for smartphones the excitement of SEGA s highly popular Sakatsuku soccer game. As of August 2018, the app had surpassed 1 million downloads. Also, we will launch a series of new titles, including the latest offering from multiple hit producer f4samurai, Inc., WONDER GRAVITY BEST BUDDY: PINO & GRAVITOR, and a PlayStation 4 version of BORDER BREAK, which has been developing a large fan base as a network-enabled amusement machine since In the packaged games area, our introduction of the latest installment in the Ryu ga Gotoku series to the U.S. market is part of initiatives to fatten existing IP through lateral rollouts. Further, we are reviving dormant IP that still have many highly enthusiastic fans. Specifically, this year we re-released Shenmue I&II, a revival of Shenmue, which debuted in 1999, and Shenmue II. And, a project is underway to revive the Sakura Wars series, which first appeared in We are also proactively incorporating third-party IP. For example, we will begin providing an amusement machine version of the highly popular Fate/Grand Order Arcade smartphone app. ( P. 31 Intellectual Property Strategy under Road to 2020) Resort Business Strategy Leverage New Nevada Licenses as a Major Advantage The Resort Business is expected to record operating loss of 3 billion due to advance investment aimed at realizing a domestic IR business. However, we intend to move PHOENIX RESORT into the black by improving its profitability. In Incheon, South Korea, the second stage of phase 1 development of PARADISE CITY is proceeding well, and the staged opening of entertainment and commercial facilities will make it a true integrated resort. The SEGA SAMMY Group acquired licenses for the manufacture and sale of gaming machines in the U.S. State of Nevada in December As well as securing a sales channel in a third market together with our sales channels in Macau and the Philippines, where we already have licenses the acquisition of these licenses has great strategic significance. In acquiring the license, the Group underwent multifaceted inspections of information relating to governance, compliance, financials, and taxes. Further, individual Group executives were scrutinized. Official recognition of conformity with the world s most exacting gaming-related standards will be advantageous not only when seeking IR licenses in Japan but also when collaborating with overseas partners. As the only domestic corporate group on an equal footing with world-famous IR operators, the Group will express a strong determination to participate in the IR industry and steadily move forward with preparations. We have further increased the number of personnel sent to PARADISE CITY to accumulate know-how to approximately 60 employees. Moreover, we are ahead of other companies in taking steps toward the establishment of commercial operations. These efforts include identifying and conducting value chain analysis based on more than 118 key components of casino operations. Yakuza 6: The Song of Life SEGA Shenmue I&II SEGA 20

23 INTEGRATED REPORT 2018 Long-Term Management Stance Always Choose the Long-Term Rather Than the Short-Term Approach Currently, we are conducting Satomi Cram Schools to instill the Group s founding principles in mid-ranking managers and above. I believe that passing on the founding principles is indispensable for sustaining the Group s development. The most important principle is that of favoring a sound, far-sighted approach. This business management philosophy reflects the belief that favoring a sound, far-sighted approach even if it means taking a roundabout route leads to success more certainly than taking shortcuts in pursuit of short-term gains or acting in ways that leave us open to criticism. Based on this management philosophy, the Group has rigorously adhered to a long-term stance in conducting business management. In fact, when I have to choose between long-term and shortterm gains, without hesitation I give priority to long-term gains. For example, if an additional few months of development is going to produce a better product, I give instructions not to compromise and to further improve the product, even though we may go over budget. Adopting this approach earns the endorsement of end users and heightens brand value. Even when we fail, rather than making excuses, employees in frontline operations can learn lessons from such experiences if we analyze the reasons correctly. Instead of simply responding to situations in an ad hoc manner, I believe that rigorously adhering to a sound, far-sighted approach is important for sustaining our development. Personnel as the Foundations of Sustained Growth Encourage Pride and Confidence among All Employees Among all stakeholders, I give the highest priority to personnel because without talented personnel we cannot satisfy customers, and without customer satisfaction we cannot provide shareholder value. In personnel development to date, we have taken a range of measures to allow employees to realize their capabilities to the utmost. Focusing on work-style reforms, we have thoroughly implemented reforms such as reducing working hours, reducing the number and length of meetings significantly, and diversifying work styles. In April 2018, we became the first company in the industry to introduce a Job Plus side job system. We introduced this system with a view to enhancing the capabilities of individuals and facilitating self-realization by respecting the autonomy of employees and enabling them to have experiences that would not be possible within the Group. We hope that this will result in employees making even greater contributions to the Group s corporate value. The The SEGA SAMMY Group s new brand logo culmination of work style reforms will be the consolidation of the Group s head office functions, which will mark a transition from a phase of work style reforms to a phase of work style improvements. In managing the Group, we focus on balancing centrifugal force and centripetal force. Centrifugal force refers to delegating authority to Group companies to expedite management decisionmaking and seeking maximized performance in line with brands and business formats. Meanwhile, the consolidation of head office functions is representative of centripetal force. The medium-tolong-term benefits of the consolidation will include enhancement of management efficiency, vitalization of personnel exchanges and operational coordination among operating companies, the realization of innovation with venture companies invited to use co-working spaces in the new office, and reductions in expenses arising from the Ordinary General Meeting of Shareholders and various other types of meetings. One of my particular aims is to develop a Group culture through the consolidation. I want to combine the various cultures of operating companies to foster a SEGA SAMMY Group culture. Our revision of the Group s brand logo stems from the same mindset. The new logo, in which all of letters are joined, symbolizes our commitment to continue growing based on solidarity among Group companies. I want all employees to be able to take pride in and feel confident about the SEGA SAMMY Group. This may seem an indirect way of proceeding, however, I feel that fostering among our employees pride in and confidence about their work and the Group is the best way of cultivating awareness of compliance and governance. Moreover, I am convinced that this is a sound, far-sighted approach that will enable us to execute the measures of Road to 2020 without fail, realize sustained growth in corporate value, and meet the expectations of shareholders and all other stakeholders. As we pursue a long-term approach, I would like to ask our stakeholders for their continued support of the SEGA SAMMY Group. August 2018 Haruki Satomi President and Group COO (Representative Director) SEGA SAMMY HOLDINGS INC. 21

24 SEGA SAMMY HOLDINGS The SEGA SAMMY Group: Past and Present Reforming Tirelessly to Overcome Adverse Conditions Between Management Integration and Fiscal 2014 Management integration 20.4% 2006 Optimize the number of amusement centers to an appropriate level 21.5% 2010 Reduces costs by reusing components, etc. (pachislot and pachinko machines) Stops developing certain large, high-end machines (amusement machine sales) Streamlines number of titles under development (packaged games) Reduces R&D expenses and content production expenses (packaged games, amusement machine sales) % % % % % % % Long-Term Benefits of Structural Reform Strengthening Rationalization 2005 Shift from Reliance on Pachislot Machines to a Balanced Portfolio (Net sales breakdown) Pachislot machines 78.9% % 52.4% Pachinko machines 15.9% Other 5.2% 13.5% Optimizing Amusement Center Portfolio (Number of domestic amusement centers) Streamlining the Number of Titles (Packaged games) Our pachislot and pachinko machines have achieved a strong presence in their markets, and we have made progress in bolstering our business structure. We have been rightsizing businesses in shrinking markets, such as those in the amusement center operations and the packaged games areas. Refocusing Management Resources Sales Growth in the Digital Games Area Personnel Dispatches for Accumulating Integrated Resort Insight billion * billion * We have advanced business structure changes by concentrating management resources in the digital games area and the Resort Business, which we position as growth businesses. * Employees who are engaged in PARADISE CITY 22

25 INTEGRATED REPORT 2018 The SEGA SAMMY Group has been reforming continuously since management integration in October Having established a solid platform by building a robust earnings structure through structural reform in fiscal 2015 and by strengthening its business portfolio management framework, the SEGA SAMMY Group set out Road to 2020, an initiative to achieve its long-term vision. Aiming to realize this vision and continuously grow corporate value, the Group will make concerted efforts to increase corporate value continuously through steady implementation of action plans. Structural Reform Road to 2020 (Fiscal 2018 through Fiscal 2020) P % 5.1% % Operating income margin 5.5% 29.5 Operating income 17.7 (Billions of yen) (Years ended March 31) Cost Structure Reform Business Structure Reform Implementation Phase To Growth Phase Reduced fixed expenses by 6 billion Reviewed business portfolio Implemented various initiatives Implemented various initiatives Clarified core businesses Growth Businesses Resort Resort Reorganized into three business segments Pachislot and Pachinko Entertainment Contents Resort Digital Games Integrated Resort Other New Areas Invested in growth businesses Grew sales Transfer of business (JOYPOLIS) Discontinuance of development of complex (Busan, South Korea) Opened PARADISE CITY (April 20, 2017) Accumulated know-how on integrated resorts Restructured unprofitable and underperforming businesses drastically Withdrew from unprofitable businesses Offered voluntary early retirement and took other measures Laid foundations for strengthening business portfolio management Established separate companies Accelerated decision making Optimized personnel deployment Reallocated personnel Focused resources on core businesses Core Businesses Pachislot and Pachinko Machines Packaged Games Amusement Machine Sales Amusement Center Operations Animation Reformed into profit structure Expanded fan base Improved Business Efficiency Pachislot and Pachinko Machines Consolidated and streamlined development / production resources Entertainment Contents Disposed of non-core business Packaged Games Acquisition of PC game developer (Amplitude Studios SAS) Amusement Center Operations Sold asset (Shinsaibashi, Osaka) Pachislot and Pachinko Machines Joint venture ZEEG Co. Ltd. with Universal Entertainment Corporation PARADISE SEGASAMMY Co. Ltd. All rights reserved. 23

26 SEGA SAMMY HOLDINGS Business Trends Net Sales* 1 Billions of yen Operating Income / Operating Income Margin Billions of yen / % Profit (Loss) Attributable to Owners of Parent* 2 Billions of yen 41.5 (FY) Operating income Operating income margin (FY) Capital Expenditures / Depreciation and Amortization* 3 Billions of yen (FY) Capital expenditures Depreciation and amortization (FY) R&D Expenses, Content Production Expenses* 3 / R&D Expenses to Net Sales Ratio Total Net Assets / Equity Ratio Billions of yen / % Billions of yen / % R&D expenses, content production expenses R&D expenses to net sales ratio (FY) ROE / ROA* 4 % ROE ROA (FY) Total net assets Equity ratio (FYE) Cash Flows Billions of yen Net cash provided by operating activities Net cash provided by (used in) investing activities Free cash flows (FY) *1 As the recognition of net sales was changed (1) from a net basis to a gross basis and (2) from a shipment basis to a delivery basis in fiscal 2016, figures for fiscal 2015 reflect these changes retrospectively. *2 The Company has adopted the Revised Accounting Standard for Business Combinations (Accounting Standards Board of Japan (ASBJ) Statement No. 21, issued on September 13, 2013) and has presented net income (loss) as profit (loss) attributable to owners of parent from fiscal *3 The aggregate calculation method has changed as of fiscal Consequently, R&D expenses and content production expenses include amortization cost of digital game titles. Until fiscal 2013, depreciation and amortization included amortization cost of digital game titles. *4 ROA = Profit attributable to owners of parent Total assets *5 As of the fiscal 2016 change in segmentation, elimination of inter-segment transactions and general corporate expenses that are not allocated to the reporting segment are included in the adjustment to segment income (loss). 24

27 INTEGRATED REPORT 2018 Operating Income (Loss) by Segment Billions of yen New Segmentation Operating Income (Loss) of the Entertainment Contents Business (Billions of yen) (FY) Digital games 8.0 (0.4) Packaged games (2.7) Amusement machine sales (3.9) (0.1) Amusement center operations Animation and toys (1.7) Other and eliminations (0.6) (0.1) (1.5) (2.4) Pachislot and Pachinko Machines Business Amusement Machine Sales Business (area) Amusement Center Operations (area) Consumer Business Other Corporate and eliminations Entertainment Contents Business Resort Business Adjustment* 5 (FY) Operating Income Margin by Segment % Pachislot and Pachinko Machines Business Amusement Machine Sales Business (area) Amusement Center Operations (area) Consumer Business Entertainment Contents Business (FY) 25

28 SEGA SAMMY HOLDINGS Operating Data Pachislot and Pachinko Machines Business Pachislot and Pachinko Machine Unit Sales Thousands of units Market Share of Pachislot and Pachinko Machines % Pachislot machine unit sales Pachinko machine unit sales (Estimate) (FY) Pachislot machines Pachinko machines Source: Yano Research Institute Ltd. (Settlement dates from July to June) Entertainment Contents Business Home Video Game Unit Sales (Cumulative) Thousands of units New title Repeat title 8,130 10,280 5,040 8,650 14,280 7,700 17,330 9,200 Average ARPMAU* 1 Yen 2,771 2,568 2,502 2,435 2,502 2,327 2,321 2,038 Number of Domestic Amusement Centers* 2 / Existing Domestic Amusement Center Sales YoY* 3 Centers / % ,880 4,650 2,100 2,410 5,240 4,250 1,250 2,550 1,160 1Q 2Q 3Q 4Q 5,500 4,560 8,130 6,580 3,250 3,150 1,310 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q (FY) (FY) *1 Calculated from dividing sales by monthly active users (MAU). Figures are quarterly basis. *2 The establishment of SEGA ENTERTAINMENT Co., Ltd., integrated the Group s amusement center operations. As a result, the aggregate calculation method for the number of amusement centers has changed as of fiscal *3 As a result of the above mentioned integration, the amusement centers classified as existing amusement centers have changed as of fiscal Number of domestic amusement centers Existing domestic amusement center sales YoY (FYE / FY) Resort Business PHOENIX RESORT: Number of Facility Users (Cumulative) Thousands PARADISE CITY: Number of Casino Users (Cumulative)* 4 Thousands Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q (FY) 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q (FY) *4 Figures for PARADISE SEGASAMMY Co., Ltd., are recorded with three months delay. 26

29 INTEGRATED REPORT 2018 Shareholder Value We will meet shareholders expectations by heightening shareholder value through the provision of stable returns to shareholders and the steady implementation of growth strategies. Returning Profits to Shareholders Policy, Results, and Outlook While directly returning profits to shareholders through stable cash dividends, we will retain the option of acquiring treasury stock in response to share price levels. Meanwhile, we will increase shareholder value continuously while taking care to balance strategic investment to win out against competitors in growth areas and to secure internal reserves needed for a further integrated resort business. For fiscal 2018, we paid cash dividends of per share. As a result, the ratio of cash dividends to net assets (DOE) was 3.0%. For fiscal 2019, we plan to pay interim cash dividends of per share and year-end cash dividends of per share, giving full-year cash dividends of per share as same as in fiscal 2018 We have introduced shareholder incentive program from the year ending march 31, Net Assets per Share (BPS) / Ratio of Cash Dividends to Net Assets (DOE) Yen Net assets per share (BPS) Ratio of cash dividends to net assets (DOE) Cash Dividends per Share / Consolidated Dividend Payout Ratio Yen % 3.3% 1, , , , Cash dividends per share Consolidated dividend payout ratio Consolidated dividend payout ratio was not applicable in fiscal 2009 and fiscal 2015 because the Group recorded a net loss in those years. 1, , , , % 3.9% % 3.5% % 3.2% % 3.1% 3.0% % % 2.9% % 174.7% (FYE) 105.0% % (FY) Acquisition of Shares of Treasury Stock (FY) million shares 5 million shares 10 million shares 10 million shares Comparison of Stock Price and Tokyo Stock Price Index (TOPIX) (Comparison based on monthly closing prices and value of 1 for October 2004 management integration) September 2005 Implements 2-for-1 stock split Fiscal 2006 Posts record earnings Structural Reform Enhance initiatives in new business areas, such as digital games area, integrated resorts (which include casinos), and resorts Records operating income of 68.7 billion Assumes businesses of Index Corporation (ATLUS) Structural Reform External factor December 2016 Enforcement of IR Promotion Bill March 2018 Significant decrease in unit sales as a result of major changes to multiple titles sales schedules in response to February 2018 enforcement of regulatory revision October 2004 Management integration External factor Revision of regulations pertaining to Entertainment Establishments Control Law Fiscal 2007 Records 35.8% year-on-year decrease in operating income External factor End of interim measures period for revision of regulations pertaining to Entertainment Establishments Control Law Fiscal 2008 Incurs operating loss External factor Intensification of debate about integrated resorts in Japan External factor Change in prototype-testing operation methods of Security Communications Association May 2017 Announcement of Road to TOPIX Share price 27

30 SEGA SAMMY HOLDINGS Financial Data Years ended March * Net sales 395, , , , ,981 Gross profit 161, , , , ,372 Selling, general and administrative (SG&A) expenses 103,279 97, , , ,754 Operating income (loss) 58,384 19,073 38,533 17,495 17,617 EBITDA* 1 74,542 37,254 58,276 39,242 38,632 Profit (loss) attributable to owners of parent* 2 21,820 33,460 30,721 (11,375) 5,369 R&D expenses, content production expenses* 3 53,348 45,294 59,219 67,622 58,042 Capital expenditures 36,141 32,871 38,182 28,780 28,046 Depreciation and amortization* 3 16,158 18,181 16,182 17,615 16,625 Net cash provided by operating activities 38,023 18,603 75,201 37,010 16,906 Net cash provided by (used in) investing activities (59,012) 6,396 (38,547) (37,734) (35,280) Net cash provided by (used in) financing activities 914 (1,116) (11,512) (15,058) 14,285 Free cash flows* 4 (20,989) 24,999 36,654 (724) (18,373) Total assets 497, , , , ,957 Total net assets 296, , , , ,950 Number of shares outstanding (Shares) 266,229, ,229, ,229, ,229, ,229,476 Number of employees (Employees) 6,700 7,008 7,472 7,888 7,606 Net sales per employee Per Share Data * Net income (loss) (46.70) Diluted net income Total net assets 1, , , , , Cash dividends Key Ratios * Gross profit margin SG&A ratio Operating income margin R&D expenses to net sales ROE ROA* Equity ratio *1 EBITDA = Operating income (loss) + Depreciation and amortization; since fiscal 2014, calculations have been based on the inclusion of amortization cost of digital game titles in depreciation and amortization. *2 The Company has adopted the Revised Accounting Standard for Business Combinations (Accounting Standards Board of Japan (ASBJ) Statement No. 21, issued on September 13, 2013) and has presented net income (loss) as profit (loss) attributable to owners of parent from fiscal *3 The aggregate calculation method has changed as of fiscal Consequently, R&D expenses and content production expenses include amortization cost of digital game titles. Until fiscal 2013, depreciation and amortization included amortization cost of digital game titles. *4 Free cash flows = Net cash provided by operating activities + Net cash provided by (used in) investing activities *5 ROA = Profit attributable to owners of parent Total assets *6 As the recognition of net sales was changed (1) from a net basis to a gross basis and (2) from a shipment basis to a delivery basis in fiscal 2016, figures for fiscal 2015 reflect these changes retrospectively. 28

31 INTEGRATED REPORT 2018, unless otherwise stated , , , , , ,013 29,527 17,720 50,088 36,900 27,607 8,930 67,102 62,087 27,063 24,196, unless otherwise stated Pachislot and Pachinko Machines Business Net sales 141, , ,649 Operating income 20,955 26,331 11,923 Operating income margin (%) R&D expenses, content production expenses 18,583 18,883 16,480 Capital expenditures 5,014 5,871 3,656 Depreciation and amortization 7,913 5,844 5,364 Pachislot machine unit sales (Units) 142, ,736 85,041 Pachinko machine unit sales (Units) 199, , ,013 16,346 16,208 59,126 26,487 (4,767) (20,422) (38,334) (28,780) 54,359 6, , , , , ,229, ,229,476 7,639 7, Yen , , % Entertainment Contents Business Net sales 190, , ,081 Operating income 4,216 11,176 14,841 Operating income margin (%) R&D expenses, content production expenses 39,222 48,129 27,228 Capital expenditures 17,867 16,668 17,254 Depreciation and amortization 11,437 8,719 9,103 Number of domestic amusement centers (Centers) Existing domestic amusement center sales year on year (%) Home video games unit sales (Thousands) 9,220 10,280 17,330 Resort Business Net sales 16,392 13,012 9,932 Operating loss (1,825) (2,244) (2,502) Operating income margin (%) R&D expenses, content production expenses Capital expenditures 5,045 4,506 1,961 Depreciation and amortization 1,047 1,162 1,

32 SEGA SAMMY HOLDINGS IP Portfolio Examples of Intellectual Properties Acquired through M&As The Creative Assembly Packaged games and online games Total War series 2005 Pachislot and Pachinko Machines Packaged Games Digital Games Capital and operational tie-up with f4samurai for smartphone games Hortensia Saga, etc First appearance 2012 Examples of acquired intellectual properties Megami Tensei series 1987 Persona series 1996 Etrian Odyssey series 2007 Total War series 2000 Football Manager series 2005 Intellectual property title Examples of intellectual properties developed in-house Sonic the Hedgehog series 白黒印刷用 Puyo Puyo series First appearance Multifaceted rollout 2016 Index Corporation (ATLUS.) Packaged games Persona series, Megami Tensei series, etc. Total editions Cumulative unit sales / downloads 30 Approx. 15 Approx. 10 Approx. Approx million (Units / DL* ) 3 (packaged and digital*3 total) Approx million (Units / DL) (packaged and digital total) Cumulative unit sales / downloads Approx. 800 million (Units / DL* ) 3 (packaged and digital*3 total) Approx. Ryu ga Gotoku series Approx. ALADDIN series Approx. Beast King series Approx. PHANTASY STAR series 1987 Approx. CHAIN CHRONICLE series million (Units / DL) (packaged and digital total) 色の変更については都度ご相談ください 9.3 million (Units / DL) (packaged and digital total) 1991*1 カラー印刷用 12.4 million (Units / DL) (packaged and digital*3 total) Total editions 1991 Amplitude Studios PC games Endless series, etc Multifaceted rollout Toys, etc. THQ Canada (currently Relic Entertainment) Packaged games Company of Heroes series, etc. Sports Interactive Packaged games and online games Football Manager series Intellectual property title Amusement Machine Sales 27.0 million (Units / DL* 3 / ID) (packaged and digital*3, AM-registered ID total (total for registrations after IP acquisition)) 11.0 million (Units / DL) (packaged and digital total) 570 thousand units (pachislot and pachinko machines and amusement machine total) 490 thousand units (pachislot and pachinko machines and amusement machine total) 5.0 million ID* 2 (cumulative total for registered IDs) Approx million DL* 3 (packaged and digital*3 total) *1 SEGA CORPORATION acquired the rights in Figures for cumulative unit sales are the totals for titles that SEGA sold after acquiring the rights. *2 Total for PHANTASY STAR ONLINE 2 *3 Including downloads of free-to-play titles Examples of intellectual properties licensed from third parties SEGA feat. HATSUNE MIKU Project series 2009 Hokuto No Ken series 2002 SOUTEN-NO-KEN series Approx. 33 Approx. 9 Approx. 6.0 million units (packaged and digital total) 2.74 million units (pachislot and pachinko machines and amusement machine total) 440 thousand units (pachislot and pachinko machines total)

33 INTEGRATED REPORT 2018 Relationship between IP and Business Sustainability IP are a wellspring of value creation. Entertainment companies possessing competitive IP are able to secure stable earnings, which in turn can be utilized to further increase the value of these properties. Accordingly, the competitiveness of entertainment companies hinges on their ability to generate new IP, discern the value of properties licensed from outside, and develop systems for protecting their IP. IP Strategy under Road to 2020 We have classified IP into four categories, and are utilizing IP strategically with a view to further business expansion. Use More Intellectual Properties New IP Existing IP WONDER GRAVITY BEST BUDDY: PINO & GRAVITOR SEGA f4samurai Readyyy! SEGA Revived IP Team Sonic Racing SEGA SHIN MEGAMI TENSEI Liberation D 2 SEGA/ ATLUS Shenmue I&II SEGA New Sakura Wars (working title) SEGA Ryu ga Gotoku ONLINE SaEGA Outside IP BORDER BREAK SEGA IDOLA PHANTASY STAR SAGA SEGA * Latest title in the PHANTASY STAR series Hokuto ga Gotoku SEGA Buronson & Tetsuo Hara/ NSP 1983 Approved No.GA-217 Fate/Grand Order Arcade TYPE-MOON/FGO ARCADE PROJECT Leverage the distinctive characteristics of IP to realize multi-channel sales (mobile devices, PCs, consoles) Strengthen publishing and localization and aim for simultaneous worldwide releases (Asia, Europe, the U.S.) 31

34 SEGA SAMMY HOLDINGS A Bird s-eye View of the SEGA SAMMY Group The SEGA SAMMY Group offers entertainment in a wide range of fields. As well as the Pachislot and Pachinko Machines Business, the Group operates the Entertainment Contents Business comprising game contents such as digital games and packaged games, amusement machines, amusement centers, animation and toys and the Resort Business, which aims to successfully establish integrated resorts. Breakdown of Net Sales, Personnel, and Total Assets in Fiscal 2018 * Before elimination of inter-segment transactions and adjustment of corporate assets Net Sales 14% Corporate (holding company) Pachislot machines Pachinko machines Other Resort Business 34% Pachislot and Pachinko Machine 52% Business 8% 2% 21% Resort Business 3% 17% 28% 33% Personnel Net Sales Total Assets 69% Net Sales 11% 1% 19% 64% 55% 19% Entertainment Contents Business 27% 23% Digital games Packaged games Amusement machine sales Amusement center operations Animation and toys Other and eliminations Performance in Recent Fiscal Years Billions of yen Favorable performances in packaged games area and amusement machine sales and amusement center operations areas Net sales 2015 Entertainment Contents Business Postponement of title launches due to effect of regulatory revision Pachislot and Pachinko Machines Business Resort Business Continuous operating loss because of prior investment phase Operating income (loss) Billions of yen 32

35 INTEGRATED REPORT 2018 Our Positions in Industry Value Chains Pachislot and Pachinko Machines Business Entertainment Contents Business Digital Games We conduct development, manufacturing, and sales in-house to enable us to cater to intensive short-term demand and develop products that reflect market demand. In recent years, we have been developing some machine cabinets through a joint venture company (ZEEG Co. Ltd.) with the aim of heightening the efficiency of the industry as a whole by establishing standardized machine cabinet platforms. Planning, development Manufacturing Sales Operations In-house Outsourcing Specializing in planning, development, and distribution, this business plans, develops, distributes, and operates PC online games and games for smartphones. The business offers a diverse range of titles, including not only titles that use in-house intellectual properties but also titles that use third party s intellectual properties. Planning, development Distribution, sales Operations, additional distribution In-house Outsourcing Entertainment Contents Business Entertainment Contents Business Packaged Games Amusement Machine Sales Since withdrawing from hardware sales in 2001, this business has been dedicated to rolling out software for multiple platforms. Because the online compatibility of packaged games is steadily rising, operations after releases are vital in the same way that they are with digital games. Also, repeat sales are becoming increasingly important. Planning, development Manufacturing Distribution, sales Operations, additional distribution, repeat distribution This business employs various business models. As well as planning, developing, and operating titles in-house, it jointly plans and develops titles and uses a revenue-sharing business model in which we share revenues from the utilization of the amusement machines with operators after the sales of titles. In addition, the business manufactures and sells such products as the UFO CATCHER prize game machine. Planning, development Manufacturing Sales In-house Outsourcing In-house Outsourcing Entertainment Contents Business Amusement Center Operations Resort Business IR Capabilities In Japan, we plan and develop amusement centers and operate them based on equipment procured from within the Group and external manufacturers. As well as traditional amusement centers, the business exploits SEGA s distinctive features to develop facilities in new areas under different business formats. Planning, development Procurement Operation In-house Outsourcing We have the ability to provide the wide range of products and services that are required for integrated resorts by drawing on our collective capabilities as a comprehensive entertainment corporate group. These include knowhow with respect to the management of integrated resorts, which we are accumulating at PARADISE CITY in South Korea, and PHOENIX RESORT s experience in the management of resort hotels. Planning, development Management of integrated resorts, including casinos (overseas) Management of resort complex, not including casinos (Japan) 33

36 SEGA SAMMY HOLDINGS The Business Models of Main Business Segments The SEGA SAMMY Group advances business activities across an expansive area in the entertainment sector, and its business models in each field are markedly different. Moreover, we tirelessly adapt our business models to better reflect changes in operating environments. Pachislot and Pachinko Machines Business Features of this business are the susceptibility of product cycles and profit margins to new machine installations and utilization rates at pachinko halls as well as the high percentage of costs for which electronic components account. We are taking measures to realize efficient development while reusing more components to increase cost effectiveness. Value Chain of the Pachislot and Pachinko Machines Business In-house Outsourcing In-house Development Average development lead time: 2 years~2.5 years Shortening development lead time under Road to 2020 In-house Manufacturing Average sales lead time: 1 month ~ In-house or agency Sales Operations Average return on investment cycle: 24 months~30 months Component reuse Conversion into components Collection of trade-ins Improves component costs and environmental burden Amusement Machine Sales Area Amusement Center Operations Area In the amusement machine sales area, we have a fabless business model. We focus on planning, design, and development and contract manufacturing to partner companies. Also, we are diversifying sales models to stimulate the market. In the amusement center operations area, our business model is based on capital investment. Supply Chain of the Amusement Machine Sales Area In-house Outsourcing In-house In-house or outsourcing In-house or outsourcing Development Manufacturing Sales Amusement center operators In-house amusement centers Sell out This is a traditional business model in which revenues are recorded as products are sold. Revenue-sharing business model In the revenue-sharing business model, we provide low-priced machine cabinets and free content to amusement center operators, sharing revenues from the utilization of the amusement machines with them. The aim of this business model is to stimulate the market and secure a source of continuous earnings. Increased adoption of this business model makes short-term growth appear to have softened. Introduction of electronic money We are introducing electronic money to enable flexible adjustment of pricing, increase customer convenience through the realization of cashless payment, and heighten the efficiency of amusement center operations. Players 3 Revenue shared based on machine utilization CVT kits 1Machine cabinets supplied at low prices, content provided without charge Amusement center operators 2Play fees Amusement center operators use CVT kits to introduce the latest game content or replace the boards and exteriors of existing machines. CVT kits help lessen the investment burden of amusement center operators by enabling them to upgrade games without purchasing new machine cabinets. 34

37 INTEGRATED REPORT 2018 Digital Games and Packaged Games Areas In the digital games area, free-to-play (F2P) is the most common business model. This model entails continuously investing in apps after their release to extend their lifetimes while recovering initial investments (development and advertising costs). In the packaged games area, as well as selling standard packaged games through stores, we are strengthening online compatibility such as download sales, which is resulting in the increasing emergence of long-tail sales patterns. Earnings in a Business Model for F2P Digital Games Net sales Title release Cumulative initial development expenses (recognized in assets) Operating costs, advertising expenses, additional development expenses, etc. Cost of amortizing initial development expenses Time Begin to amortize initial development expenses Costs (development expenses and operating costs) Earnings in a Business Model for Packaged Games For packaged games, the long-tail sales pattern is progressing in download sales. Further, in recent years a rise in repeat sales has been helping to lift the basic levels of unit sales and improve profitability. Increasing Repeat Sales Millions of units Title release (Plan) (FY) Net sales (unit sales X price) Cumulative initial development expenses (recognized in assets) Repeat sales New title sales Advertising expenses, additional development expenses, etc. Begin to amortize initial development expenses Time Begin to amortize initial development expenses Costs (development expenses) 35

38 SEGA SAMMY HOLDINGS The SEGA SAMMY Group Going Forward The Business Environment Surrounding the SEGA SAMMY Group The Group conducts business activities in domains with differing industry characteristics and a variety of business environments. We focus on the business environment from a medium- to long-term perspective and continue to take the steps necessary for expanding corporate value. Business Environment Pachislot and Pachinko Machines Business Since September 2014, the gradual strengthening of regulations has affected the market, causing declines in unit sales among other challenges. Going forward, while conforming to new rules and in addition to the degree to which we are able to create gameplay that appeals to users, we expect that durability and other machine quality issues will also become elements of differentiation and assume the disparities among manufacturers will widen even further. Number of Pachinko and Pachislot Players Million Prolonged contraction Source: White Paper on Leisure Industry 2018, Japan Productivity Center (CY) Entertainment Contents Business F2P smartphone game app business model has broadened the range of users, but in recent years the pace of growth has been slowing steadily as the spread of smartphones has reached the end of a cycle. In the amusement center operations market, the player population has been trending toward long-term decline, but in recent years it has bottomed out and is beginning to improve. Value of Japan s Home Video Game and Online Platform Markets Billions of yen Amusement Machine Sales / Revenues from Amusement Center Operations Billions of yen , , , , (Estimates) (Forecasts) Online platform Home video game software (including online games) (FY) Home video game consoles Source: Famitsu Game White Paper 2018 Amusement machine sales Source: Amusement Industry Survey 2016, JAIA Revenues from amusement center operations (FY) Resort Business As the Integrated Resort (IR) Implementation Bill, which includes casinos, went into effect in July 2018, a movement toward the full-fledged establishment of integrated resorts, which are positioned as the trump card in the government s plan to make Japan a travel destination goes underway. Numerous companies including global corporations have announced participation in integrated resorts in Japan and they are moving forward with preparations aimed at facility openings in the 2020s. We assume operator selection will be based on a variety of criteria including capital resources, operational knowhow, and compliance. PARADISE SEGASAMMY Co. Ltd., All rights reserved. 36

39 INTEGRATED REPORT 2018 Assumed Opportunities and Risks Going Forward Opportunities Widening of the gap between winners and losers: Development capabilities, financial resources, and strong product reliability will differentiate the Group in the expected widening of the gap between winners and losers in the pachislot and pachinko machine market, enabling the Group to enjoy the benefit of being an industry survivor. Risks Regulatory risks: The strengthening of regulations has a direct impact on the sales of pachislot and pachinko machines. Decline in player population: A decreasing player population lowers pachinko hall operators ability to undertake capital investment and affects unit sales. Responses Promote reuse Develop an industry platform Improve development efficiency P. 44, P. 52 (Special Feature, Business Strategy by Segment) BtoC* measures * Business to consumer: A form of business where transactions are conducted directly between a company and general consumers. Opportunities Packaged games market expansion: The packaged games market is expanding due to the spread of current-generation platforms. Trend toward high-end digital content: The trend toward high-end apps due to advances in device functionality and telecommunications infrastructure is providing a tailwind for the Group given its development capabilities and financial resources. Growth potential of overseas digital games markets: There is significant growth potential for the app market overseas, particularly in parts of East Asia that have a cultural affinity with Japan. Risks Intensification of competition in Japan s digital games market: Due to intensifying competition resulting from softening growth and market saturation, the risk of being unable to achieve envisioned returns on investments is increasing. (Digital games area) Create global hit titles Expand overseas publishing business Maintain earnings through long-term management of existing titles Develop titles for nextgeneration consoles, etc. Maximizing the value of intellectual portfolio P.48, P.56 (Special Feature, Business Strategy by Segment) Oligopoly in the global digital games market: Popularity is becoming increasingly focused on major titles that have earned long-standing player endorsement. (Digital games area) Opportunities Establishment of the integrated resort industry in Japan: The realization of integrated resorts in Japan could become a major business opportunity for the Group. Risks Delays in domestic integrated resort legislation delays: Delays in the development of integrated resort-related legislation will have a substantial impact on the Group s long-term scenario. Acquire know-how for success in the integrated resort business P. 62 (Business Strategy by Segment) 37

40 SEGA SAMMY HOLDINGS Group Strategy Road to 2020 Having established a solid platform by building a robust earnings structure during a structural reform phase and by strengthening its business portfolio management framework, the SEGA SAMMY Group set out a long-term vision. Aiming to realize this vision, we established Road to 2020, an initiative targeting fiscal In a concerted effort, the Group will implement concrete measures and overcome uncertain business conditions to realize medium-term performance targets and achieve continuous increases in corporate value over the long term. Mission Pyramid At the same time as implementing strategies, we are encouraging a change of mindset among employees. As part of these efforts, we have embedded Road to 2020, (covering fiscal 2018 through fiscal 2020) into a mission pyramid that comprises the unchanging components of our DNA: a value, a mission (raison d être), a vision (ideal self), and a goal (specific target). Value (Mindset / DNA) Creation is Life Always Proactive, Always Pioneering Mission (Raison d être) Continuing to create moving experiences Making life more colorful Be a Game Changer Vision (Ideal self) Pachislot and Pachinko Machines Entertainment Contents Resort Sammy the wellspring of new ideas as an innovator in the industry Be a Game Changer Be an Experiential Innovator Goal (Specific target) Operating income margin: At least 15% ROA* 1 : At least 5% Operating income margin: At least 30%* 2 Sales: At least billion Operating income: At least 30.0 billion Operating income margin: At least 10% Succeed in IR businesses Enhance brand value *1 ROA = Profit attributable to owners of parent Total assets *2 Operating income margin of the Pachislot and Pachinko Machines Business excluding other and eliminations 38

41 INTEGRATED REPORT 2018 Medium-Term Goals We are transitioning into a phase of implementing measures aimed at making dramatic progress in the closing stages of Road to We intend to take measures that strengthen business portfolio management, enhance efficiency and growth simultaneously, and increase our profit margin. Operating income margin: At least 15% Reinforce earnings base Enter new growth areas ROA*: At least 5% Fiscal 2019 (Plan) Operating income margin 5.4% (Excluding relocation expenses associated with consolidation of head office functions 7.3%) Pachislot and Pachinko Machines Business operating income margin 15.2% Entertainment Contents Business operating income margin 5.2% Growth Businesses Implement business strategies to grow earnings Concentrate management resources in growth areas Core Businesses Improve profit margins and generate stable revenues by reforming business processes IR (Integrated Resorts) Other new businesses Fiscal 2014 Fiscal 2015 Fiscal 2016 Fiscal 2017 Fiscal 2018 Medium-Term Initiatives ( Fiscal 2020) Long-Term Vision (Fiscal 2021 ) * ROA = Profit attributable to owners of parent Total assets Portfolio Shift Set digital games area as the driver for increasing in net sales and operating income. Meanwhile, we anticipate an increase in the profitability of the Pachislot and Pachinko Machines Business. Net Sales Breakdown Operating Income Breakdown* Amusement center operations area Animation and toys area Amusement center operations area Resort Business Pachislot and Pachinko Machines Business Amusement machine sales area Packaged games area Animation and toys area Fiscal billion Amusement machine sales area Fiscal billion Fiscal billion Digital games area Fiscal billion Packaged games area Entertainment Contents Business Entertainment Contents Business Digital games area Pachislot and Pachinko Machines Business * Excluding the Resort Business, which is expected to record an operating loss of 1.0 billion 39

42 SEGA SAMMY HOLDINGS Road Map to Corporate Value Enhancement The Group will unfailingly execute the following measures to continue exceeding the expectations of its customers, society and shareholders sustainably over the long term. Surpass Customers Expectations Continuing to create moving experiences Making life more colorful Be a Game Changer Pachislot and Pachinko Machines Business Pachislot and Pachinko Machines Operating income margin: At least 30% 1 Improve development efficiency Realize machine quality improvements and product launches in peak by shortening development periods 2 Use ZEEG machine cabinets and strengthen reuse Enhance product capabilities, strengthen reuse efficacy, and build an industry platform through the use of high-quality machine cabinets 3 Respond to regulatory revisions, implement BtoC measures Develop new machines compliance with regulatory revisions, expand fan base by implementing BtoC measures Entertainment Contents Sales: At least billion Operating income: At least 30.0 billion Operating income margin: At least 10% Resort Business Succeed in IR businesses Enhance brand value Entertainment Contents Business 1 Create titles that become global hits Reshuffle organizational structure, review product quality with awareness of user evaluations to achieve IP-centric innovations 2 Shift from device-oriented to IP-oriented organization Studios take IP inventory and implement title strategies for each IP studio 3 Optimize organizational structure for global deployment Expand overseas publishing, localize in accordance with local needs and early release overseas Stable dividends Enhance financial base and flexibility in secure fund procurement to participate in IR business Retain a diverse array of personnel Shift personnel to strategic domains Work-style innovations Resort Business 1 Acquire know-how to succeed in the integrated resort in Japan Implement value chain analysis, expand deployment of employees to overseas integrated resort facility 2 Overseas integrated resort Achieve overseas IR business success and acquire IR business know-how, expand business through implementation of first-phase secondary development of PARADISE CITY Acquire gaming machine manufacture and sales license in the U.S. State of Nevada Make full use of existing IP, revival IP, and outside IP Launch new IP Responses to social and environmental risks Collaborate with partners and suppliers 40

43 INTEGRATED REPORT 2018 Achieving the Road to 2020 Surpass Shareholders Expectations Sustainably Enhance Corporate Value Mission (Raison d être) Vision (Ideal self) Goal (Specific target) (Specific target) Goal Operating income margin: At least 15% Vision Increase asset quality Enhance business portfolio by introducing hurdle rates, etc. Leverage control (maintain equity ratio at 50% 60%) Increase employee productivity and strengthen innovative capabilities Maximize value of IP Mitigate risks and make effective use of outside resources ROA: At least 5% Improve capital efficiency Surpass Society s Expectations Maintain productivity and sustainability of non-financial capital Exceed the expectations of all stakeholders 41

44 SEGA SAMMY HOLDINGS A Message from the CFO While advancing financial strategies in light of medium-to-long-term perspectives, we will support the implementation of Road to 2020 and achieve continuous increases in corporate value. Koichi Fukazawa Executive Vice President and Group CFO (Director of the Board) SEGA SAMMY HOLDINGS INC. Our Basic Stance on Financial Strategies We will support business strategies through financial strategies. efforts to manage the interest rate sensitivity of fund-raising and the Group s overall financial risk with respect to the global market. Looking further ahead, we hope to realize integrated control of fund-raising and fund management on a global basis. Based on Road to 2020, which covers the period through fiscal 2020, the SEGA SAMMY Group is advancing medium-term business strategies with its sights set on an operating income margin of at least 15% and ROA of at least 5% as management targets. Meanwhile, we are supporting business strategies by establishing medium-term financial strategies which are on the opposite side of the same coin from the medium-term business strategies and advancing measures in a planned manner. In fiscal 2018, we completed a framework for the integrated control of the Group s domestic fund-raising and fund management, which we built over approximately two years. We have begun full-fledged fund management aimed at increasing the precision of cash flow forecasts, enhancing capital efficiency, and heightening the profitability of businesses. The next step is to establish global initiatives and risk exposure as financial themes. At present, overseas sales only account for about 10% of the Group s revenues. However, given that the effect on Japan s market of the long-term decline in the birth rate is unavoidable, senior management views expanding overseas businesses centered on the digital games and packaged games areas as an important management task. Anticipating this management vision, we will begin by managing exchange rate exposure for overseas business transactions. Then, we want to extend the scope of our Road to 2020 Financial and Capital Strategies and Fiscal 2019 Strategies We will support investment in growth areas. As a medium-term strategy, Road to 2020 calls for proactive investment in growth areas, centered on the digital games area, to create titles that become global hits. We will support such business strategies by securing adequate capital provision while paying close attention to financial discipline. In fiscal 2019, accelerated marketing of new titles in the digital games area is expected to result in year-on-year increases of 11.3 billion in R&D expenses and content production expenses, to 73.3 billion, and 6.7 billion in advertising expenses, to 22.1 billion. Beginning in August 2018, we plan to transfer and consolidate the head office functions of respective Group companies in stages. As a result, we expect to record one-time transfer expenses of 7.5 billion. I want to maximize the benefits of this investment not only by strengthening coordination among businesses and creating synergies but also by actively standardizing and integrating corporate management functions and introducing common infrastructure. 42

45 INTEGRATED REPORT 2018 Preparation for Participation in the IR Business We are giving priority to maintaining robust financial foundations and a net cash position. At this juncture, we are not sure about the future operational structure and finance format of integrated resorts in Japan, which we see as the pillar of long-term business strategy. However, we need to secure a high level of shareholders equity as a risk buffer and maneuverable, flexible fund-raising. This will enable us to be responsive if corporate finance becomes the key factor in seizing the initiative in the IR industry as the only domestic corporate group on an equal footing with the major resort operators that have announced their intention to participate in Japan s IR industry. For these reasons, the Group is giving priority to maintaining a net cash position. In fiscal 2018, we reduced interest-bearing debt, even though we expected the Pachislot and Pachinko Machines Business, which is our cash cow, to generate lower gross cash flows due to regulatory revision. As a result, interest-bearing debt was 86.9 billion, down 15.9 billion from the previous fiscal year-end, and net cash was 89.6 billion. Meanwhile, I want to continuously broaden our flexible fund-raising options by securing such facilities as commitment line agreements (approximately 55.0 billion) and overdraft agreements (approximately 75.4 billion). Business Portfolio Management Never complacent about our current standing, we will stringently monitor asset efficiency. equity, we are currently using ROA rather than ROE as an important index because ROA is a target that the SEGA SAMMY Group can advance toward cohesively. To a certain extent, the rebalancing of assets that we implemented in fiscal 2017 improved the quality of assets. However, we are by no means completely satisfied with our current status. We constantly remain aware of capital cost as we rigorously evaluate businesses and strengthen management of the business portfolio with a view to realizing ROA of at least 5%. Despite the fact that the business is presently in an advance investment phase, we view the performance of the Resort Business as an important issue. In particular, I am aware of the need to strengthen the earnings model of PHOENIX RESORT CO., LTD. As well as setting a strict investment hurdle rate, I think that we must innovate to meet consumers needs and foster our brand rather than relying on additional investment. Given that the Resort Business is positioned as the Group s third pillar and that the business aims to participate in the IR business in Japan in the near future, we are bracing ourselves to take on more-challenging goals and thereby heighten investment efficiency. Until now, we have primarily used profit and loss as a uniform benchmark for evaluating businesses. Going forward, however, we will conduct multifaceted evaluations that better reflect the characteristics of businesses by incorporating non-financial key performance indicators, such as labor productivity and corporate vitality, in addition to financial key performance indicators, such as the cash base and asset efficiency. Based on these multifaceted evaluations, we intend to enhance the precision of planning and realize even stricter management of investment efficiency. In preparing for future participation in the IR business in Japan, as well as being in a phase of securing a high level of shareholders Net Cash Cash and deposits* billion Net cash 89.6 billion Interestbearing debt 86.9 billion * Cash and cash equivalents at end of period in consolidated statements of cash flows (FY) 43

46 SEGA SAMMY HOLDINGS Special Topic Overcoming Adversity in the Pachislot and Pachinko Machines Business The Pachislot and Pachinko Machines Business has directly taken on various challenges brought about by changes in the business environment. By constantly changing ourselves and overcoming adversity, we have secured a position as a top manufacturer. An Industry Affected by Regulations Shock from No. 5 Pachislot Machine Models Regulatory revisions implemented in July 2004 mainly focused on restricting excessive gambling elements in pachislot machines (No. 4 models) back then. Based on these unprecedentedly strict regulatory revisions, pachislot machines were switched out for models that complied with the new regulations (No. 5 models). The new regulations altered the gameplay in ways that advanced a decline in pachislot player numbers, strongly impacting pachinko halls. As a result, after a three-year interim measures period, in 2008 overall sales volume in the pachislot machine market had fallen 48% compared with that of the previous year. Industry Affected by Regulations Based on the Enforcement Regulation of Entertainment Establishments Control Law, pachinko and pachislot machine manufacturers are allowed to sell new machine models only after going through several approval processes. Machines are tested for compliance with regulations that determine the current rules for materials, performance, gameplay, and other aspects. For this reason, the number of acquired conformity qualifications can have an impact on sales plans and change gameplay in ways that lead to a decline in the player population. Approval Process for Pachinko and Pachislot Machines Machine manufacturers 1. Application for prototype testing 2. Issuance of certification of prototype testing 3. Application for testing 4. Issuance of certification of prototype testing 5. Contract / delivery 6. Application for approval Security Communications Association Public Safety Commission in each prefecture Pachislot / Pachinko halls 7. Approval 8. Commencement of operations District police station Constant Change in the Business Environment Long-Term Downtrend in Pachinko Machines since 2010 In contrast to the long-term ongoing downtrend in pachislot machines, pachinko machines followed an uptrend until 2009, boosted by the replacement of pachislot machines directly impacted by the No. 5 machine model shock. In 2010, however, pachinko machines entered a downtrend that still continues to date, owing to deterioration in business conditions for pachinko hall owners amid the shrinking population of players, weak replacement demand due to higher prices for the machines, and changes in voluntary regulations at industry associations. Marketing that focused on lower-priced pachinko balls in a bid to expand the user base failed to turn around market conditions. Size of Pachinko and Pachislot Machine Market / Unit Sales Unit sales for pachislot machines Unit sales for pachinko machines Size of pachislot machine market Size of pachinko machine market Source: Yano Research Institute Ltd. 604 thousands of units billion billion 1,408 thousands of units (FY) (Fiscal years from July to June) 44

47 INTEGRATED REPORT Change 01 Strengthening pachinko machines 2009 Leading pachislot machine market (No. 5 models) Change Change 03 Market conditions changed by No. 6 machine models Change 03 Change 01 Comprises of core members of development, sales and production divisions Change 02 GATE 2 Strengthening Pachinko Machines Amid stagnancy in pachislot machines, SEGA SAMMY moved to strengthen its development capabilities with the aim of improving its industry presence in pachinko machines to a level on par with pachislot machines. First, the Company reassessed its development structure and strengthened product development capabilities for pachinko machines. The Company reassigned some members of the pachislot development team to pachinko development and strengthened the appeal of products by incorporating outside opinions and using Market-Savvy Development Structure Based on Close Collaboration of Three Divisions (2008) GATE 1 GATE 3 Product Strategy Committees Strict quality check performed at each gate After sales are completed, sales results, utilization data, and market evaluations are analyzed and reported to the Product Strategy Committees Review stringent production evaluation standards during development. Using market information gathered by our market research division, our development, sales, and production divisions share an integrated series of processes from development through to sales, and we have introduced a gate management system that entails strict product assessments at multiple stages. Having thoroughly refined our approach to market-savvy manufacturing, we launched Pachinko CR Hokuto No Ken in September 2008 based on the original Hokuto No Ken, which was popular on the pachislot scene at the time. This launch resulted in 260,000 unit sales, which have broken the unit sales record of previous pachinko machine at Sammy drastically and received strong support from users. Thereafter, our pachinko machines continued to climb to the top of the rankings, leading to the creation of a balanced product portfolio. GATE 4 Approval and sales External organization tests machines to ensure targeting of market needs with high precision Pachinko CR Hokuto No Ken 1983 Buronson & Tetsuo Hara NSP2007, Approved No. SAE-307 Sammy 45

48 aking life mo SEGA SAMMY HOLDINGS Change 03 Change 02 Change 01 Change 03 Change 02 Change 01 Leading Pachislot Machine Market (No. 5 Model) Sammy has led the industry in creating novel game machines while complying with each regulatory revision. Even after the No. 5 machine model shock ( P. 44) in fiscal 2009, Sammy created titles with new gameplay, such as Pachislot Spiderman and Pachislot Ring Ni Kakero, and won over players. In particular, with Pachislot Psalms of Planets Eureka Seven, we were able to create new gameplay within the framework of No. 5 machine models. This product became an engine for Sammy to overcome changes in the business environment ahead of rivals. At the same time, as other companies released similar products, the product began a trend and thereby stimulated expansion of the pachislot market. Although it restricts gambling aspects, the regulatory revision enforced in February 2018 has not only introduced maximum payout rates but also minimum payout rates. This change will allow companies to develop pachinko and pachislot machines with gameplay geared more toward the casual player. With respect to pachislot machines, changes in voluntary regulations have enabled the development of pachislot machines that can be enjoyed in a shorter period of time. As for pachinko machines, it has become possible to use new settings (multi-stage payout ratio), meaning that companies can offer players a wider range of gameplay. For pachislot machines in particular, shorter play Market Share in Pachislot Machines % % 2005 BONES/Project EUREKA BANDAI NAMCO Entertainment Inc. Sammy With Always Proactive, Always Pioneering as its company creed, Sammy will continue to polish its industry-leading development capabilities and create innovations one after the other while flexibly adapting to new regulatory revisions. Market Conditions Changed by No. 6 Machine Models times for players of new-format machines create the potential for unearthing new demand. In recent years, the time needed to play pachislot machines has been lengthening. These longer play times were causing casual players to leave the pachislot machinemarket and were preventing the participation of new players. Given that it creates opportunities to provide players with pachinko and pachislot machines that can be played casually for short periods of time, the recent regulatory revision could lead to a return of former players and attract new players, thereby putting a brake on the decline in the pachinko and pachislot machine player population and the contraction of the pachinko and pachislot machine market. Outline of February 2018 Regulatory Revisions (Enacted on February 1, 2018) Manufacturer 1. Ball output regulations 2. Addition of specifications for machines to enable easy checking of ball output data* 1 3. Introduction of settings for pachinko machines *1 Enables play without touching balls or medallions (electromagnetic recording and payment) Estimate for Reaching 300 Tokens Using Pachislot Machine with AT Function* 2 Playable in a short time No. 6 model* minutes Number obtained: minutes No. 5.9 model* 4 Number obtained: 300 Limits on gambling elements Number obtained: 2,400 Number obtained: 3,000 One game 75 games 150 games 1,500 games *2 One game assumes to be finished in five seconds *3 No. 6 model assumes medals increase per game is 4.0 *4 No. 5.9 model assumes medals increase per game is 2.0 (Maximum increase under voluntary regulations) (AT: abbreviation for pachislot machines assist time) 46

49 re colorful INTEGRATED REPORT 2018 Turning Changes in the Market Environment into New Opportunities Amid contraction in the market environment, the promotion of reuse, which is a target under Road to 2020, will have a major impact on future earnings and the industry. The Reuse Promotion Department was established as the main entity overseeing reuse, and it is working for expanding the number of components qualified for reuse and promoting standardization of components to thoroughly control direct material costs. In March 2016, Sammy established ZEEG Co. Ltd. as a joint venture with Universal Entertainment Corporation. By promoting the common use of units and components in machines, we are advancing collaboration across the industry toward the creation of a common platform. Future Vision Painted by ZEEG Sammy aims to improve product capabilities by fusing its accumulated technologies with the expertise that Universal Entertainment Corporation has in the hardware field. We have undertaken initiatives to generate considerable synergistic benefits by creating an efficient earnings structure that reduces procurement costs. We aim to help improve efficiency and invigorate the entire industry by getting as many game machine manufacturers involved as possible. ZEEG has begun to develop development kit for software (ZSDK) with an eye on the future of the game machine industry in addition to its initiatives related to increasing the reuse of hardware. A word to watch is ZSDK, which stands for the ZEEG Amusement Machine Software Development Kit. The purpose of the ZSDK is to standarize software components that are essential for the development of game machines, which would enable sales unifying hardware and software in a way that makes it possible to create simply designed machines with universal software. By lowering barriers to entry, this will lead to more efficient machine development as the content development capabilities of other companies are brought into play. We hope it will also invigorate the entire market. The name ZEEG (meaning last egg) embodies these aspirations for creating an industry platform that will drive the entire industry forward. ZEEG s Business Model: The Impact of Reuse across Corporate Boundaries Reuse on a larger scale than at the individual company level will become possible, taking for example, a recovered Sammy machine cabinet that is used by Universal Entertainment Corporation. This will lead to a considerable reduction in procurement costs. If the number of companies participating in the reuse program increases, it will become possible to increase profits by selling these machine cabinets to other companies (for use as a general-purpose cabinet). Reuse Flow Development and production at manufacturers Sammy Recovery by each company Sammy ZEEG s Area of Responsibility Universal Entertainment Universal Entertainment Distribution centers of each company Component companies (Suppliers) Other manufacturers Pachinko hall Other manufacturers Direct delivery Components supplied on a unit and machine cabinet basis ZSDK Initiative The ZSDK initiative aims to enable the reuse of software components in addition to hardware components by unifying software development tools and selling it as a package in the future. Utilizing ZEEG cabinets increases the reused component ratio and the ratio of cabinets used, thereby cutting purchase costs on an individual component basis 47

50 SEGA SAMMY HOLDINGS SEGA s World-Class Creativity We aim to sustain profit growth by focusing on what customers truly desire and providing moving experiences to the world with a passion for quality, a strength of the SEGA Group. Kenji Matsubara President & COO SEGA Games Co., Ltd. Passion for Creating is a Strength of the SEGA Group There is an ethos at SEGA Games Co., Ltd., that is always present and flowing throughout the SEGA Group. It is our passion for creating. Our thorough pursuit of quality is an undeniable strength that is evident in the innovative products and services that SEGA has created to date, including its graphics, game systems, world views, and music. This ethos is a strength of the entire SEGA Group, shared among Group operating companies and studios inside and outside Japan. In the packaged games area, in recent years sales have remained brisk as a result of our leveraging this strength in overseas business, which is being reinforced under the Group s long-term vision Road to With overseas business a growth driver, earnings have been trending upward on a worldwide basis. SEGA s World-Acclaimed Quality Sonic is perhaps the SEGA Group s most widely recognized IP. Released in August 2017, Sonic Mania has become a major hit with over one million downloads worldwide. This game title is a tribute to the original Sonic titles that hails back to the Mega Drive (Sega Genesis) game console era, including Sonic the Hedgehog which was the first title of series released in While staying true to the world views of the original version, this game title is loaded with new elements that have won over many gamers, especially people overseas who have long been fans of Sonic since the time Sonic was a 2D graphic. Over the past few years, sales of packaged games in the overseas market have tended to be strongly influenced by ratings published on game review websites. On Metacritic, one of these review websites for games, movies and music, Sonic Mania has received very positive reviews. Group company ATLUS CO., LTD., released Persona5 overseas in 2017, and it ranked No. 1 overall in PlayStation 4 ranking 2017 out of the huge number of games available, including the titles of global mega-publishers. This game title is a successful hit with more than 2.2 million copies sold worldwide, and overseas sales are more than double the sales in Japan. I would like to stress that this success came despite the game being an RPG based on Japan s view of the world, with Japanese high school students as the main protagonists in the story. 48

51 INTEGRATED REPORT 2018 In Yakuza 6: The Song of Life, althorgh the main character is played by the legendary Yakuza and set in Tokyo and Hiroshima, it has sold as many copies overseas as it has in Japan. In the past, the Japanese market has generated the bulk of sales for these series, and although it has elements that are appealing to overseas. However, the game was not developed with European and U.S. markets in mind. Thanks to painstaking efforts to create a game that Japanese fans will appreciate, the title has become popular not only in Japan but also won over fans overseas who praise the refined game sense of the title. I believe this is why Yakuza 6: The Song of Life has become such a popular hit around the world. Improving perceptions of the SEGA Group are also a reflection of the steady repeat sales in foreign countries. In the past, the key was how many copies can be sold in the first two months of a game s release, because thereafter it was necessary to release discounted versions and cut prices in order to move inventory. Nowadays, however, repeat sales tend to hold steady thanks to demand remaining firm for titles that have been out a few years since their original release, owing in part to successful measures to introduce series titles like the Sonic the Hedgehog series, in addition to the popularity of the Steam a game distribution platform, which has created a huge market especially in Europe. Needless to say, repeat sales after development costs are amortized are a boon for profitability. Persona5 Unit Sales / Downloads Persona5 ATLUS SEGA All rights reserved. 2Q Release of Japanese version (Japan) 3Q 4Q Fiscal 2017 Fiscal Q Persona5 cumulative unit sales Over 2.2 million Release of English version (North America, Europe) Release of Hangul version (Korea) Release of traditional Chinese version (Hong Kong, Taiwan) 2Q Localization Capabilities for Global Releases There is one more key factor that explains the brisk sales overseas. Before a Japanese game is released overseas, it is localized into the language of each country and region. For example, Persona5 has been translated into three languages (English, traditional Chinese, and Hangul). No matter if a game is popular in Japan, it is unlikely to win over fans around the world if the localization is insufficient. The SEGA Group has localization studios that make a huge difference when games are sold overseas. ATLUS became a member of SEGA Group due to the transfer of business in 2013, which has the studio located in California, U.S.A. The studio understands both Japanese and American games very well, and is able to localize Japanese games in a way that accurately conveys the unique world views of Japanese titles to local gamers. The studio is able to maximize the entertainment value of localized games that reflect these unique world views, and this has led to very positive reviews from local gamers. During the product development stage, game content is shared with the localization team for translation before the development is finished, facilitating the rapid release of foreign language versions of the game. We will strengthen such collaboration further with the aim of simultaneously releasing games around the world, which is an objective of Road to Earn profits globally with localization that wins over fans in foreign countries Japanese version of Persona5 Japanese version of Ryu ga Gotoku 6: Inochi no Uta Global versions of Persona5 California localization studio at ATLUS Global versions of Yakuza 6: The Song of Life 49

52 aking life mo SEGA SAMMY HOLDINGS System for Designating Responsibility for Profits in Projects No matter how much we seek higher quality, unless profits can be earned, we would be unable to continue providing moving experiences. We have raised awareness to a higher level for thinking about what our customers truly desire, while at the same time clarifying responsibilities for profits (operating income) in each development project. The aim is to encourage the creation of games that can thrive on the market while giving everyone a sense of accomplishment and autonomously controlling development costs. While we cannot create popular hits intentionally, it is possible to gain some control over keeping unprofitable titles from emerging. When we judge if it is not worth spending additional investment to continue the project made based on a disciplined assessment of profitability, we have reluctantly made decisions to discontinue some projects. The instilling of this kind of framework for improving the cost efficiency of each project has also made a significant contribution to stronger profitability over the past few years. In contrast to the strong-performance in packaged games area, the digital games area has struggled to grow these past few years with inadequate returns on investment. Time has passed since the launch of major titles including CHAIN CHRONICLE, Puyopuyo!! Quest, and Hortensia Saga, and these titles seem to have run out of steam. Although new titles SHIN MEGAMI TENSEI Liberation Dx2 and kotodaman have elicited a response, we still do not have enough popular titles. We must reassess what our customers truly desire in order to create new hit games, and strengthen management of development schedules and costs in addition to our post release operational capabilities. In this area, we are adopting the same approach clarifying responsibilities and setting targets for operating income in each project that led to results in the packaged games area. Since digital games take less time to develop than packaged games, we aim to enhance development precision, including schedules and costs, by carefully checking progress on a monthly basis in addition to reviews in meetings for each development phase billion 11.1 P/L Responsibility and Preventing Unprofitable Projects Operating Income / Loss in Entertainment Contents Business (FY) Aiming to Maximize the Value of Extensive IP Assets Amid rapid growth of the digital games market, we split off companies along game device types, and our business expanded at the same pace as market growth. As market growth begins to taper off, however, it makes more sense to have a management structure that maximizes the value of our extensive IP assets by utilizing them regardless of game devices. For this reason, in April 2017 SEGA Games discontinued the company system based on game device type, and switched to an organization centered on IP. With the goal of creating global hit titles under Road to 2020, the Company is taking full advantage of IP assets, including existing IP, idle IP, new IP, and outside IP, to better coordinate IP in multiple channels and expand IP for global markets. 50

53 re colorful INTEGRATED REPORT 2018 Global Collaboration to Revive IP SEGA Europe gets involved in publishing The SEGA Group has more than 4,000 developers around the world. By working together across countries, regions, and studios, we aim to establish a framework for creating games globally for markets around the world. Shenmue Dreamcast version (1999) SEGA Shenmue I&II (PS4 / X Box One / PC) (2018) SEGA EUROPE Shenmue II Dreamcast version (2001) SEGA Japanese packaged game version By realigning our organization along IP, development teams that used to create packaged games are now also working on digital games such as Ryu ga Gotoku ONLINE, as they challenge themselves to create games for different platforms. Collaboration across the organization has also picked up. One example of this collaboration is employees at ATLUS and SEGA Games working together on SHIN MEGAMI TENSEI Liberation Dx2, which was released in January 2018 as a smartphone app version of the Megami Tensei series of RPGs for home game consoles. Moreover, titles made in collaboration with outside IP owners, such as Total War: WARHAMMER 2, have been doing well. Regarding idle IP, in 2018 we re-released Shenmue I&II, a revival of Shenmue, which debuted in 1999, and Shenmue II. This title was the culmination of cooperation across studios with SEGA Europe Ltd., our development studio based in the U.K., directly involved in its publishing. In addition to re-releases, we are also working on completely new games using idle IP like New Sakura Wars (working title), which was announced in April For smartphones and PCs European and U.S. packaged game versions SEGA SEGA SEGA Considerable Potential of the SEGA Group While we have successfully improved earnings to some degree, we have only just crossed the start line. We will be able to deliver moving experiences to more people around the world by taking a two-pronged approach to growing existing IP, reviving idle IP, and effectively utilizing outside IP, and to creating new IP. The SEGA Group is confident there is considerable potential for growth in each prong of this approach. I believe realizing this growth potential would delight our shareholders as well. With our employees, we aim to draw out the considerable potential of the Group. 51

54 PACHISLOT & PA Business Strategy Pachislot and Pachinko Machines Business SEGA SAMMY HOLDINGS Industry Structure With the player population declining as a result of regulatory changes and entertainment diversification, pachinko hall operators financial positions have worsened and the pachinko and pachislot machine market continues to contract. Consequently, the demand for expansion of the user segment base is rising. Companies entering market Pachinko and pachislot machine industry Sammy Share Share of pachislot machine market 14.1% Market size Share of pachinko machine market 9.9% Market size Demand side 1 Pachinko halls As declining player numbers reduce their investment capacity, pachinko hall operators are carefully selecting only those machines that generate return on investment consistently (machines with high utilization rates). Demand side 2 Players Player numbers are declining due to excessive gambling elements or changes in gameplay. As a result, pachinko halls investment capacity is weakening. Substitute products Diversification of entertainment The young generation is leaving the pachinko and pachislot market as entertainment diversifies, with smartphone apps being a representative example billion (2017) 515.7billion (2017) Number of pachinko halls Player population , million Source: Yano Research Institute Ltd. Potential barriers to market entry Development of manufacturing bases, development of sales channels, and accumulation of development capabilities centered on staging capabilities ,596 Source: National Police Agency million Source: White Paper on Leisure Industry 2018, Japan Productivity Center External factors Prototype-testing rules and internal regulations of industry P.44 Changes in regulations for the development and sales of new pachinko and pachislot machines can affect the gameplay of products as well as the development schedules of pachinko and pachislot machine manufacturers. Business Portfolio Sales Breakdown Fiscal 2018 Others 14% Operating Income Margin Road to % billion 16.9% 14.8% 17.7% 11.3% 15.2% Pachinko machines 52% Pachislot machines 34% (Plan) (Plan) (FY) 52

55 CHINKO MACHINE INTEGRATED REPORT 2018 Road to 2020 Business Strategy Vision Be a Game Changer Sammy the wellspring of new ideas as an innovator in the industry Goal Operating income margin* At least 30% * Excluding other and eliminations of the Pachislot and Pachinko Machines Business Major Tasks Promote Component Reuse For pachislot machines, we aim to increase the number of reusable components to at least 50 so that they account for more than 50% of costs, versus the present level of 30%. Further, we will raise the common components ratio to at least 90% for pachislot machines and at least 50% for pachinko machines. The above measures will strengthen the earnings structure. Increasing percentage of reusable components Design products with reuse in mind Formulate title lineup aimed at increasing reuse Increase reusable components Targets for Number and Percentage of Reusable Components (Pachislot) Number of reusable components Percentage of reusable components Promoting common components Promote common components Increase components common to pachislot and pachinko machines Reduces disposal risk and increases reuse Targets for Percentage of Common Components (Fiscal 2020) Pachislot machines Pachinko machines At least 50 30% At least 50% At least 90% At least 50% Current level From fiscal 2020 Current level From fiscal 2020 Build Industry Platform Established as a joint venture with Universal Entertainment Corporation, ZEEG Co. Ltd. will lead efforts to introduce common component units to the industry as a whole, thereby enhancing product appeal and cost performance. Also, the company will help revitalize and raise the efficiency of the entire industry. In fiscal 2019, we plan to market a new title that uses a ZEEG-made machine cabinet. Shorten development lead times to ensure product marketing coincides with peak market demand Narrow down titles and increase personnel per title Reform development process comprehensively (in-house approval system, quality control process, promotion of in-house production) Strengthen quality assessment process (test playing) Implement Business-to-Consumer Measures By holding offline events and operating information websites for smartphones, we are increasing direct communication with consumers and energizing the industry. In summer 2018, we held two Shortening development lead times and strengthening the quality assessment process to realize timely product launches that tap into market demand events in connection with the SAMMY SUMMER PROJECT 2018 that were attended by many enthusiastic fans. Reforming development process and enhancing product quality Traditional planning process After reform Planning Planning Production Traditional lead time of years Production Strengthened quality assessment Quality assessment Prototypetesting application Prototype-testing application Traditional lead time of years Shortened by 20% 30% 53

56 SEGA SAMMY HOLDINGS Fiscal 2018 Summary Following February 2018 enforcement regulation revisions and the reconsideration of self regulations, strategic revisions to the sales schedule resulted in an approximately 60% decline in pachislot machine sales compared to the previous fiscal year while pachinko machine sales remain unchanged. As a result, in fiscal 2018, net sales were billion (a decrease of 28.7% from the previous fiscal year) and operating income was 11.9 billion (a decrease of 54.7% from the previous fiscal year). Pachinko CR Hokuto No Ken 7 Resurrection Buronson & Tetsuo Hara/NSP 1983, NSP 2007 Approved No.YKO-116 Sammy Pachislot Hokuto No Ken Shindensetsu souzou Buronson & Tetsuo Hara/NSP 1983, NSP 2007 Approved No.YBJ-918 Sammy Billions of yen / % Q Through 2Q Fiscal 2017 Through 3Q Full year 1Q Through 2Q Fiscal 2018 Through 3Q Full year Full year Fiscal 2019 (Plan) Net sales Operating income Operating income margin SEGA SAMMY Group s Positions in the Pachinko and Pachislot Machine Market Ranks 31.8% 1st 21.8% 1st 13.5% 3rd 21.3% 1st 30.9% 1st 23.9% 1st 15.3% 2nd 21.7% 1st 16.8% 1st 14.7% 2nd 24.3% 1st 14.1% 3rd 3.5% 8th 3.4% 8th 11.7% 3rd 10.8% 5th 11.8% 3rd 12.8% 3rd 8.7% 5th 9.7% 4th 12.0% 5th 10.5% 6th 9.0% 6th 9.9% 3rd Pachislot machine market share Source: Yano Research Institute Ltd. Pachinko machine market share FY (settlement dates from July to June) 54

57 INTEGRATED REPORT 2018 Strategic Actions and Topics for Fiscal 2019 In fiscal 2019, regarding pachislot machines, from the second half we are planning the full-scale introduction of machines conforming to new regulations (No. 6 machine models). We plan to release nine new titles and expect sales of 103,000 pachislot machine units (in the fiscal year under review, 85,000 units were sold). In terms of pachinko machines, sales will be focused on machines already licensed under regulations before the revisions. We plan to release nine new titles and expect sales of 201,000 pachinko machine units (in the fiscal year under review, 140,000 units were sold). As a result, in fiscal 2019, we expect Pachislot and Pachinko Machines Business net sales of billion, an increase of 15% from the previous fiscal year and operating income of 18.5 billion, an increase of 55% from the previous fiscal year. Operating income excluding relocation expenses associated with consolidation of head office functions amounts to 20.1 billion. Launch of Pachinko CR Shin Hokuto Muso Official Successor Model Since its market launch of Pachinko CR Shin Hokuto Muso in March 2016, cumulative Hokuto Muso series has sold over 80,000 units, and currently maintains a high utilization rate at pachinko halls. In September 2018, the official successor model Pachinko CR Shin Hokuto Muso Chapter 2 (old-format machine) was released and is expected to drive pachinko machine sales in fiscal The pachinko machine lineup in fiscal 2019 will comprise mainly of old-format machines. Going forward, we will take time to engage in the creation of newformat machines. Accelerating the Launch of New-Format Pachislot Machines (No. 6 machine models) in the Second Half Pachislot machine first-half sales is focusing mainly on type- 5.9 machines, including change of specification titles such as Pachislot Hokuto No Ken Syura No Kuni Hen Rasetsu Ver., with the full-scale introduction of No. 6 machines scheduled in the second half. As we already have new titles for No. 6 machines, we will accelerate the launch of No. 6 machines, including Pachislot CHAIN CHRONICLE. ( P.46 for No. 6 machine model details) Launch of Machines Using ZEEG-Made Machine Cabinets Joint venture ZEEG Co. Ltd., established by the Sammy Corporation and the Universal Entertainment Corporation, plans to launch new titles using ZEEG-made machine cabinet during fiscal ZEEG Co., Ltd. promotes the use of common units and parts in an effort to reduce costs by reusing parts and building an industry platform. ( P.47 for ZEEG details) Pachinko CR Shin Hokuto Muso Chapter 2 Buronson & Tetsuo Hara/NSP 1983, Approved No.KOK Koei Tecmo Games Co., Ltd. Sammy Pachislot CHAIN CHRONICLE SEGA SEGA/CHAIN CHRONICLE FILM PARTNERS Sammy ZEEG 55

58 ENTERTAINMEN Business Strategy Entertainment Contents Business SEGA SAMMY HOLDINGS Industry Trends Snapshot The Entertainment Contents Business segment operates in diverse entertainment areas that have markets with different growth potential and competitive conditions. Furthermore, as well as intensifying competition within the entertainment industry, the evolution of digital devices is leading to direct competition between the entertainment industry and other industries as they try to attract users. Amusement Machine Sales Area Packaged Games Area Market size Contracting Contracting Market size (Japan) Contracting Expanding billion Source: JAIA, Amusement Industry Survey 2016 Market size billion Amusement center operations area Contracting billion Expanding billion billion billion Source: CESA Games White Paper 2018 Figures here begin from 2014 because the estimation method changed significantly in Players The adoption of new game consoles and successive launches of popular software are driving expansion in the packaged games area. Expanding billion billion billion Source: JAIA, Amusement Industry Survey 2016 Players million 13.4 million Against the backdrop of diversification of entertainment due to penetration of smartphones, the number of young players who used to be the core player group is declining. Source: JAIA, Amusement Industry Survey 2018 Source: White Paper on Leisure Industry 2018, Japan Productivity Center Contracting Moving Players Player base is expanding in a wide range of age groups, not just young male players, who used to be the core player group for video games. Expanding Digital Games Area Moving Animation and Toys Area Market size (Japan) Animation market size Toys market size Expanding Softening billion billion Source: Media Development Research Institute Inc billion Source: Japan Toy Association billion billion billion Source: Famitsu Games White Paper ,178.7 billion Business Portfolio Sales Breakdown Fiscal 2018 Animation and Toys 22.5 billion Other and eliminations 3.9 billion Digital games 38.5 billion Operating Income (Loss) Breakdown FY billion 4.9 billion FY billion 3.3 billion 6.5 billion Amusement center operations 39.0 billion Amusement machine sales 47.1billion billion Packaged games 57.0 billion 2.6 billion 1.7 billion 2.2 billion 1.2 billion billion 2.7 billion 2.7 billion 2.0 billion billion Digital games Packaged games Amusement machine sales Amusement center operations Animation and toys Other and eliminations 56

59 TCONTENTS INTEGRATED REPORT 2018 Road to 2020 Business Strategy Vision Be a Game Changer Goal Sales At least billion Operating income At least 30.0 billion Major Tasks Operating income margin At least 10% Create Titles That Become Global Hits Focusing on digital games and packaged games, we will create major hit products in the global market by taking advantage of management resources, focusing investment on carefully selected titles, and building a business structure that facilitates global rollouts. Transitioning from diversified to focused investment Select titles carefully (aim for major rather than mid-range hits) Focus investment on promising titles (reinforce promotion) Creating a structure that facilitates global rollouts Shift from device-oriented to IP-oriented business Reinforce structure by integrating functions of regional bases Restructuring Business Structure Including Organization to Achieve Strategies Shift from Device-Oriented to Intellectual Property-Oriented in Organization to Rolling Out Content through Multiple Channels The Group has a huge amount of IP, including existing IP and idle IP. We will make full use of these new and outside IP as we roll out individual IP globally through multiple channels. This approach will maximize the value of IP. We will promote publishing and localization when rolling out content globally. Accordingly, we have also reorganized studios in each region around IP. Operating groups Target devices Publishing groups Domestic and Asian studios Multiple devices Japan and Asia European studios Europe North American studios Mobile PCs Consoles North America Grouping studios around IP and rolling out content for multiple devices globally Increasing efficiency by integrating publishing functions regionally 57

60 SEGA SAMMY HOLDINGS Main Points by Area We will generate stable profit based on a balanced portfolio without depending on a specific IP, title, or business. Digital games area In addition to creating global hit titles, we aim to secure stable earnings through the long-term operation of existing titles and expand profit through the release of new titles based on IP strategy. Create global hit titles Expand overseas publishing business Maintain earnings through long-term operation of existing titles Develop next-generation titles PHANTASY STAR ONLINE 2 SEGA SHIN MEGAMI TENSEI Liberation D 2 SEGA/ ATLUS Packaged games area Favorable PC content in North America and Europe. Also, the Group will utilize development engines effectively to heighten development efficiency. Increase sales of existing IP and obtain new IP for the PC content market in North America and Europe Build earnings base by undertaking contract development Take on challenge of developing new IP Revive major IP SONIC FORCES SEGA Total War: WARHAMMER 2 Copyright Games Workshop Limited Warhammer, the Warhammer logo, GW, Games Workshop, The Game of Fantasy Battles, the twin-tailed comet logo, and all associated logos, illustrations, images, names, creatures, races, vehicles, locations, weapons, characters, and the distinctive likeness thereof, are either or TM, and/or Games Workshop Limited, variably registered around the world, and used under licence. Developed by Creative Assembly and published by SEGA. Creative Assembly, the Creative Assembly logo, Total War and the Total War logo are either registered trademarks or trademarks of The Creative Assembly Limited. SEGA and the SEGA logo are either registered trademarks or trademarks of SEGA Holdings Co., Ltd. or its affiliates. All rights reserved. SEGA is registered in the U.S. Patent and Trademark Office. All other trademarks, logos and copyrights are property of their respective owners. Utilize development engines effectively Conduct localization and sales in accordance with attributes of each global region 58

61 INTEGRATED REPORT 2018 SEGA LaLaport FUJIMI SEGA ENTERTAINMENT Co., Ltd. Amusement center operations area Amusement machine sales area We will increase investment efficiency through a No. 1 in category strategy and cost reductions. StarHorse3 Season VI FULL THROTTLE SEGA Launch No. 1 in category titles Step up cost reduction efforts We will change the sales composition of existing amusement centers according to the market environment and promote IT investment including the introduction of electronic money to enable flexible pricing strategies in the future UFO CATCHER TRIPLE SEGA and to enhance player convenience. Improve operational efficiency by introducing electronic money Gain revenue from new businesses Respond to market structure according to the market environment Disney&Disney/Pixar Characters Dream Switch Disney Disney. Based on the Winnie the Pooh works by A.A.Milne and E.H.Shepard. Disney/Pixar Slinky Dog. Poof-Slinky,Inc. FIAT Model T Porsche ANPANMAN D.I.Y. Moving ANPANMANGO-CAR Takashi Yanase/Froebel-kan, TMS,NTV Animation and toys area We will increase the earning power of three mainstay animation IP: Detective Conan, ANPANMAN, and Lupin the 3rd. As for toy sales, we will grow earnings from existing IP while setting our sights on entering new fields through partnerships. Animation Toys Yowamushi Pedal GLORY LINE Wataru Watanabe (Akitashoten) 2008/ Yowamushi Pedal 04 Film Partners 2018 Detective Conan: Zero the Enforcer 2018 GOSHO AOYAMA/ DETECTIVE CONAN COMMITTEE All Rights Reserved. Increase earnings from three mainstay IP Enhancing Detective Conan, ANPANMAN, and Lupin the 3rd Strengthen distribution business targeting Japan and overseas Reinforce 3D CG production Grow earnings from existing IP Create stable earnings centered on ANPANMAN series Take on new fields through partnerships 59

62 SEGA SAMMY HOLDINGS Fiscal 2018 Summary The results of prioritizing title improvements, the number of new titles launched falling short of initial assumption and lead to a decline in revenues and earnings in the digital games area. However, increased income in the packaged games, amusement machine sales, amusement center operations, animation and toy areas resulted in fiscal 2018 net sales of billion (an increase of 1.2% from the previous fiscal year) and operating income was 14.8 billion (an increase of 32.8% from the previous fiscal year). In the packaged games area, cumulative worldwide sales of Persona5, which began overseas development in the current fiscal year, exceeded 2.2 million units. Together with the expansion of repeat sales of previous launched titles (catalog titles), total unit sales of the packaged games growth exceeding 60%. Persona5 ATLUS SEGA All rights reserved. Sonic Mania SEGA SONIC FORCES SEGA Billions of yen / % Q Through 2Q Through 3Q Fiscal 2017 Net sales Operating income Operating income margin Full year 1Q Through 2Q Through 3Q Fiscal 2018 Full year Full year Fiscal 2019 (Plan) Strategic Actions and Topics for Fiscal 2019 In fiscal 2019, we will launch multiple new titles including major titles mainly in the digital games area, targeting a 24% increase in net sales and an 8% decrease in operating income compared to the previous fiscal year. Operating income excluding relocation expenses associated with consolidation of head office functions amounts to 18.5 billion. In the digital games area, we plan to launch 12 new titles. In the packaged games area, we will continue targeting earnings growth by further strengthening the global roll out of domestic titles, creating new IP and the repeat sales of existing titles. In the amusement machine sales area, in addition to the sale of the UFO CATCHER series and other prize game machines, we plan to launch new titles including Fate/Grand Order Arcade, an amusement machine that uses as a motif the world of Fate/ Grand Order for smartphones. In the amusement center operations area, we will continue efforts to enhance amusement center operations and promote the introduction of electronic money. In the animation and toys area, we will premiere new films and promote the online distribution of various animation series. We also plan to launch mainstay products in the toys area. 60

63 INTEGRATED REPORT 2018 Proactively Launching Successive New Titles (Digital Games Area) In fiscal 2019, we plan to launch 12 new titles in the digital games area. kotodaman, launched in April 2018, has been downloaded more than 8 million times and even now the user pool continues to expand as we nurture it from the medium-term view point. SEGA Pocket Club Manager is also performing favorably. We will continue to release new titles, WONDER GRAVITY BEST BUDDY: PINO & GRAVITOR, the new title from f4samurai, which is steadily producing hit titles such as Hortensia Saga, and the free-to-play game Total War: Arena, which has Wargaming, the world s largest publisher as the publishing partner. kotodaman SEGA SEGA Pocket Club Manager SEGA All Rights Reserved By JFA. The use of images and names of the football players in this game is under license from FIFPro Commercial Enterprises BV. FIFPro is a registered trademark of FIFPro Commercial Enterprises BV. Expanding IP Utilization We will promote the expanded use of IP based on the Road to 2020 policy prioritizing a shift from device-oriented to IP-oriented business. As an improvement of IP value through the lateral deployment of existing IP, we began distribution of BORDER BREAK for the PlayStation 4, a title launched as an arcade game in We also plan to launch Ryu ga Gotoku ONLINE, the online version of Ryu ga Gotoku, a strong IP in the packaged games area. In terms of developments for the revival of idle IP, we brought back the Shenmue series, the very first title of which was launched in 1999, and will launch New Sakura Wars (working title), as brand-new title of Sakura Wars for the first time in 13 years for this series boasting a strong fan base. We will also move steadily forward with efforts to utilize outside IP such as Fate/Grand Order Arcade and Total War: WARHAMMER 2, which combines Total War and WARHAMMER. BORDER BREAK SEGA WONDER GRAVITY BEST BUDDY: PINO & GRAVITOR SEGA f4samurai Fate/Grand Order Arcade TYPE-MOON / FGO ARCADE PROJECT O N G E K I SEGA Ryu ga Gotoku ONLINE SEGA 61

64 SEGA SAMMY HOLDINGS Business Strategy Resort Business Business Strategy Aiming to become a future pillar of the Group, the Resort Business segment will strengthen the profitability of its resort complex operations while accumulating expertise in the intgrated resort business. Vision Be an Experiential Innovator Goal Succeed in the IR business Enhance brand value Major Tasks Acquire Expertise to Ensure Success of the Intgrated Resort Business With our sights set on participating in the intgrated resort business in Japan, we will acquire know-how in the operation of resort complexes through PHOENIX RESORT while accumulating expertise in the development and operation of integrated resorts through our business partnership with the PARADISE GROUP of South Korea. PHOENIX RESORT March 2012 Acquired all shares of PHOENIX RESORT April 2013 Renovated and reopened Tom Watson Golf Course August 2016 Renovated and reopened Sheraton Grande Ocean Resort July 2017 Renovated Garden Area hot spring facilities PARADISE SEGASAMMY July 2013 Acquired Paradise Casino Incheon through PARADISE SEGASAMMY November 2014 Began construction of South Korea s first integrated resort, PARADISE CITY April 2017 Opened casino, hotel, and convention hall of PARADISE CITY (1-1) From September 2018 in series Open new area of PARADISE CITY, including club, boutique hotel, shopping mall, spa and water park (1-2) Dispatching Group employees in stages One of Japan s Foremost Resort Complex Phoenix Seagaia Resort Situated on 700 hectares of land extending 11 kilometers north to south along the Pacific coast of Miyazaki Prefecture, Phoenix Seagaia Resort invites guests to experience a superb resort that makes the most of stunning surroundings. The resort complex comprises the Sheraton Grande Ocean Resort and two other accommodation facilities; a world-class convention center with a maximum capacity of 5,000 people; and sports facilities, which include one of Japan s renowned golf courses, the Phoenix Country Club, and a tennis club. To increase the resort complex s ability to attract guests, we constantly add value Phoenix Resort to the resort facility. At the same time, we are working to acquire know-how in the operation of resort complexes. 62

65 INTEGRATED REPORT 2018 PARADISE CITY, South Korea s First Intgrated Resort Facility PARADISE CITY, operated by PARADISE SEGASAMMY Co., Ltd., a joint venture with the PARADISE GROUP of South Korea, is the first integrated resort in South Korea equipped with a hotel, casino, convention hall, club, and other facilities. In addition to the aim of becoming the premier intgrated resort facility in Northeast Asia through the provision of a high-quality atmosphere and services, we are promoting the accumulation of development and management know-how with the intention of entering the intgrated resort business in Japan. PARADISE SEGASAMMY Co., Ltd. All rights reserved. We are conducting value chain analysis through local staff from Japan covering over 118 items, investigating the elements necessary for integrated resorts and considering our response. Through a variety of analyses, including the exploration of areas where we can expect to be able to differentiate by leveraging our strengths and areas where we can take specific measures, we will attempt to refine our strategy to enter the intgrated resort business in Japan. Transforming into the Only Company in Japan Able to Comprehensively Manage Integrated Resorts That Include Casinos With a view to participation in the intgrated resort business in Japan, the SEGA SAMMY Group is sending personnel overseas. As of October 1, 2018, we have deployed at total of 57 employees to the main business divisions of PARADISE CITY. These employees are accumulating know-how in relation to development and operations as they share information to the Japan Integrated Resort Business Department through Integration of Administration Functions. We are steadily transforming into the only company in Japan able to comprehensively manage integrated resorts that include casinos. This could become a major competitive advantage with respect to participation in the intgrated resort business in Japan. Coordination in the Intgrated Resort Business SEGA SAMMY HOLDINGS PARADISE CITY Incheon project members: 87 personnel in total (57 overseas, 30 in Japan) * As of October 1, 2018 Japan Integrated Resort Business Department Sharing know-how with a view to domestic integrated resorts Sharing know-how with a view to domestic integrated resorts Business management Japan Market Planning Management Section Casino planning Management support Personnel development and human resources, accounting Surveillance Operational management Operational management and support PHOENIX RESORT Marketing Japan and China marketing, marketing support Hotels Casino hotels Commercial facilities Entertainment Organizational Category Japan Market Planning Management Section Surveillance Casino Planning Personnel Development and Human Resources Accounting Operational Management Operational Support Japan and China Marketing Marketing Support Casino Hotels Commercial Facilities and Entertainment Summary of Activities Conducts overall management aimed at expanding Japan s market and sharing know-how with Japan Integrated Resort Business Department Ensures safety within casinos by using security cameras to monitor and analyze customers and employees Undertakes planning for casino business as a whole, including casino machine mixes and various types of promotions based on sales analysis Develops personnel for casino operations by preparing human resources plans, hiring personnel, and developing personnel Undertakes cash settlement and cash collection within facilities and conducts money laundering inspections Manages table games in casinos, including management of dealers and floor persons Provides support, including management of chips, playing cards, and peripheral equipment for games Provides local customer services and sales activities for VIP customers and conducts direct customer services aimed at developing new customers Manages promotions targeting general customers and provides customer services through information helpdesks Makes various types of arrangements and provides other services mainly for VIP casino customers Plans, develops, and operates commercial facilities and entertainment 63

66 SEGA SAMMY HOLDINGS Fiscal 2018 Summary Despite an 8% increase in the number of Phoenix Seagaia Resort guests compared to the previous fiscal year, the Resort Business reported a decrease in income due to sales of a portion of shares of a company engaged in the development and operations of an indoor theme park in the previous fiscal year. In addition, prior investment costs for the full-fledged intgrated resort business resulted in increased margin losses compared to the previous fiscal year. As a result, net sales were 9.9 billion (a decrease of 23.7% compared to the previous fiscal year) and there was an operating loss of 2.5 billion (compared to an operating loss of 2.2 billion in the previous fiscal year). Billions of yen Q Through 2Q Fiscal 2017 Through 3Q Full year 1Q Through 2Q Fiscal 2018 Through 3Q Full year Full year Fiscal 2019 (Plan) Net sales Operating loss Strategic Actions and Topics for Fiscal 2019 In fiscal 2019, we will strive to attract more guests to the Phoenix Seagaia Resort. We will also work to enhance the value of PARADISE CITY facilities and acquire intgrated resort development and operations know-how. In fiscal 2019, we expect net sales of 10.0 billion and an operating loss of 3.0 billion. Toward the Participation in Integrated Resorts in Japan PARADISE CITY Phase 1 2 Business Development Facilities Open In September 2018, PARADISE CITY opened as 1 2 business development facilities comprising commercial and cultural facilities under the theme art-tainment including a premium spa, a club, entertainment facilities, and a boutique hotel. This marks the completion of 80% of the land development planned in phase one. PARADISE CITY PARADISE SEGASAMMY Co., Ltd. All rights reserved. Acquisition of Nevada State Gaming Machine Manufacture and Distribution License On December 1, 2017 (local time), Sega Sammy Creation USA, INC. (hereinafter, SSCU ), acquired a Nevada state gaming machine manufacture and distribution license. To acquire this license, a strict examination of SSCU governance and compliance systems, financial and tax information, business partners, and litigation history was conducted. Meeting the world s most rigorous licensing standards and eligibility criteria is a major strategic advance that also demonstrates the Group s capability to engage in the intgrated resort business in Japan. 64

67 INTEGRATED REPORT 2018 ESG 66 Toward Sustainable Growth in Corporate Value 68 Human Resource Strategy 70 Work-Style Reforms (Examples of initiatives related to the seven themes) 72 ESG Risks and Responses in the Value Chain 74 Social Factors 76 Environmental Factors 78 Social Contributions 79 Non-Financial Data 80 Corporate Governance 86 Directors, Audit and Supervisory Board Members, and Executive Officers 65

68 SEGA SAMMY HOLDINGS Toward Sustainable Growth in Corporate Value We will realize true sustainability as a corporate group. Haruki Satomi President and Group COO (Representative Director) SEGA SAMMY HOLDINGS INC. Realizing Our Essential Value In recent years, nations have been taking steps focused on shared international objectives under the banner of the SDGs (Sustainable Development Goals). At the same time, society is increasingly looking to companies to help address worsening social issues. Moreover, as investment in environmental, social, and governance (ESG) initiatives rises, society expects companies to conduct business management that emphasizes ESG factors and proactively discloses related information. As a corporate group that is a member of international society, we have a strong sense of our obligation to benefit society. The SEGA SAMMY Group has made clear its commitment to fulfilling responsibilities and roles in international society by becoming a signatory to the United Nations Global Compact (UNGC) and is steadily advancing initiatives to these ends. In a wide range of business fields, we are promoting environment-friendly design and reducing energy consumption. For example, one of our business strategies is to simultaneously lower environmental burden and improve profitability by increasing the number and percentage of reused components in our products. Also, primarily in business areas where we have fabless business models, we undertake rigorous supply chain management based on such principles as the elimination of child labor and forced labor. Other initiatives include our ongoing support for restoration of areas damaged by the Great East Japan Earthquake. We not only provide food, clothing, and housing but also morale-boosting support that we are particularly qualified to offer as a comprehensive entertainment corporate group. Through such activities as restoration support events that leverage our entertainment content, we will continue providing moving experiences to many people in areas that need help. Further, we have confirmed that the aims of our existing initiatives coincide with the aims of 13 of the 17 SDGs. In relation to ESG information, the Group will strengthen disclosure and actively increase direct dialogues so that shareholders and investors can assess the Group s business management in light of long-term perspectives. To heighten the effectiveness of such initiatives and ensure their continuity, we will carefully analyze and respond to such emerging trends as the emphasis on SDGs and ESG factors. At the same time, we will implement initiatives that reflect our essential value so that they do not become formulaic or superficial. Through business activities based on its mission of CONTINUING TO CREATE MOVING EXPERIENCES and MAKING LIFE MORE COLORFUL, the Group will earn recognition of its value from society and continue growing with it. In this way, we will realize true sustainability as a corporate group. 66

69 INTEGRATED REPORT 2018 Focusing Efforts on Three New Themes Reflecting the SDGs While continuing and strengthening existing initiatives, we will examine and implement concrete measures under the following three social issue-based themes, which we have identified as areas on which we should concentrate particular efforts. The first theme is job satisfaction and diversity. The main focus of the Group s work-style reforms is the achievement of a balance between work and private life. We want employees to have quality time outside of the office so that they do not lose their creative drive. Well-established measures that the Group has introduced to reduce long overtime work have produced tangible results. Our employees do between 80% and 90% less long overtime work than they did in Launched in April 2018, the Job Plus sideline job system aims to encourage innovation by enabling employees to experience work and acquire skills in areas beyond their regular jobs. Creative ideas are generated through exchanges among people with different ways of thinking. We want to develop a corporate culture that accepts diverse values and eliminates inequality arising from gender, age, religion, and any form of attribute or disability and which enables employees to draw on their individuality in their jobs. Using the consolidation of head office functions as an opportunity and with reference to seven policies relating to job satisfaction and inequality ( P.69), each company will set goals reflecting its situation and prepare and take specific measures. Our second theme is addiction. The World Health Organization has recognized gaming disorder as a condition that results from immersion in video games and which seriously impairs health. This disorder, along with addiction to pachinko and pachislot machines, are important issues that the Group needs to address sincerely. Accordingly, we want to implement initiatives that spread and increase awareness of addiction prevention measures. The third theme is the super-aging society. We believe that our products and services can help elderly people maintain their well-being and provide them with opportunities for communication. We also want to increase the opportunities for elderly people who seek employment or reemployment. Responsible for action plans and other planning functions, the Group CSR Promotion Office is currently revising the Group CSR Charter and all other existing CSR policies in light of the SDGs. Further, the Group CSR Promotion Office will carefully analyze the 17 SDGs and their 169 associated targets, identify areas where the Group can contribute, and then create concrete action plans. We want to involve all employees in the implementation of these plans. Therefore, through in-depth dialogue with employees we will ensure that each employee understands the connection between business activities based on the mission pyramid* and the SDGs. As the SEGA SAMMY Group mobilizes its collective strength to create a bright future for society and sustain growth in corporate value, we would like to ask our stakeholders for their continued support. * The Mission Pyramid comprises specific strategies aimed at realizing a mission (raison d être), a vision (ideal self), and a goal. This strategy pyramid was established to ensure the implementation of measures that are focused on fiscal 2020 and based on Road to SDGs Measures Positioned social contributions through mainstay businesses as an important task of business management and established the Group Mission Group CSR Promotion Office currently revising the Group CSR Charter and all other existing CSR policies in light of the SDGs Will carefully analyze and examine SDGs based on new CSR policies that reflect the SDGs 67

70 SEGA SAMMY HOLDINGS Human Resource Strategy The Group continuously endeavors to create moving experiences by strengthening its human resources. We ensure stable recruitment and training of excellent personnel, secure the diversity that we believe to be the source of innovation, and implement work-style reforms aimed at raising labor productivity. For more information regarding initiatives based on our CSR Charter or ESG-related data, please visit the Social Responsibility section of our corporate website: Shifts in Human Resources Portfolio Linked with Growth Strategy The number of consolidated Group employees has generally been increasing since fiscal 2012, when the Company began widely expanding business operations in the digital games area and the Resort Business. Employee numbers have increased in the digital games area due to domestic and international M&As, and intensified mid-career recruitment. In the Resort Business, numbers have increased mainly because of the acquisition of PHOENIX RESORT CO., LTD., and personnel shifts from other businesses and areas. Employee Numbers by Segment 7,726 Development Personnel by Segment Entertainment Contents Business 2018 Pachislot and Pachinko Machines Business Amusement machine sales area Digital games area Packaged games area Animation and toys area (FYE) Pachislot and Pachinko Machines Business Amusement Machine Sales Business (area) Amusement Center Operations Business (area) Consumer Business Digital games area Packaged games area Animation and toys area Resort Business Other area Entertainment Contents Business * In fiscal 2015, the Group changed its business segments. The abovementioned areas are subsegments of the Entertainment Contents Business segment. Selected for Indexes of in SRI Indexes Adopted by the GPIF as ESG Indexes SEGA SAMMY HOLDINGS was selected as a constituent for two socially responsible investment (SRI) indexes adopted by the Global Pension Investment Fund (GPIF) as ESG indexes: the MSCI Japan ESG Select Leaders Index and the MSCI Japan Empowering Women Index (WIN). The Company qualified for inclusion in the MSCI Japan ESG Select Leaders Index as a constituent of the MSCI Japan IMI Top 500 Index that particularly excels in ESG. Our selection for inclusion in the MSCI Japan Empowering Women Index was predicated upon the quality of our disclosure of information in accordance with the Act of Promotion of Women s Participation and Advancement in the Workplace compared to other constituents in the MSCI Japan IMI Top 500 Index. 68

71 INTEGRATED REPORT 2018 Work-Style Reforms Aimed at Promoting Diversity Since 2014, the Group has produced definite results with its countermeasures geared toward reducing long overtime hours. These countermeasures are based on the ideal of Let s enjoy our private and professional lives by working hard, playing hard, and studying hard. In April 2017, the Company informed all Group companies of its seven themes for work-style reforms. Further Advancement of Work-Style Reforms Supported by Group Office Integration In summer 2018, the Group consolidated its offices into one new office. The Company is currently establishing a state-of-the-art office environment that creates synergy and inspires business collaboration by eliminating isolation due to physical distances between offices. In support of this effort, we are doing our very best to take down walls between Group companies by giving mutual functions which encourage interaction between personnel. SEGA SAMMY HOLDINGS will pursue further productivity by introducing cutting-edge information and communications technology at all companies that relocate to the office and support the businesses of startup companies and individual entrepreneurs alike by establishing a co-working space of about 1,322 m 2 in its new office. Fenox Venture Capital, Silicon Valley company, is also stationed at the office, helping to make it a location that promotes the co-creation of innovation. With this consolidation of offices, our Group s work-style reforms have entered a new stage. Based on our seven themes, we are establishing targets and promoting specific measures that match the characteristics of each operating company. Additionally, the SEGA SAMMY Group established an information exchange site, Waku Lab, to encourage individual employees to autonomously devise work-style reforms through their own ingenuity. We are actively sharing work-style reforms across company boundaries. Consolidated 20 companies and about 6,500 employees into the Osaki area in Tokyo Waku Lab information exchange site Seven Work-Style Reform Themes 1 Further rectification of long overtime hours 2 Raise transparency of operations and avoid dependence on individual skills 3 Implementation of diverse work styles such as flex time and telework 4 Support for nursing and childcare and promotion of female participation 5 Adoption of health guideline management 6 Capacity development through provision of educational opportunities 7 Reflection of work-style reforms in establishment of Company goals and the personnel evaluation system ( P.70 71) 69

72 SEGA SAMMY HOLDINGS Human Resource Strategy Work-Style Reforms (Examples of initiatives related to the seven themes) Theme 1 Further Rectification of Long Overtime Hours Redution of Long Overtime Hours The Group launched initiatives aimed at reducing the number of employees working long overtime hours at SEGA Games Co., Ltd., SEGA ENTERTAINMENT CO., LTD., TMS ENTERTAINMENT Co., Ltd, and SEGA TOYS CO., LTD., in 2013 and continued applying them until We also implemented measures geared toward reducing long overtime hours altogether, primarily at these five companies. Primary Measures Occupational training, compliance training (establishing and improving awareness) Attendance management, enforcement of punching-in (check for excessive or unpaid overtime) Individual alerts for employees per month Monthly reports on number of employees working overtime and amounts of overtime (release report through executive committee or the council of managing directors, share information regarding actual conditions) Consultations with superiors for employees working long overtime hours Establishment and fixation of no-overtime and no-meeting days Adjustment of work volumes, streamlining of meetings, revision of operational flow, etc. Results Reduced number of employees working long overtime hours (more than 80 hours per month) by 80% 90% Currently reviewing initiatives for further improvement moving forward Employees working long overtime hours Before initiatives 80% 90% reduction After initiatives Theme 3 Implementation of Diverse Work Styles such as Flex Time and Telework Adoption of Flex Time Systems and Review Regarding Telework Systems at Major Group Companies With an eye on full-scale implementation, the Group is conducting training for directors and managers at its operating companies that is designed to improve understanding regarding work-style reforms. Additionally, we are promoting the review and implementation of work and vacation styles that properly recognize work life balance at each Group company. In particular, our three primary companies have adopted flex time systems as a work-style diversification measure and are advancing ongoing reform initiatives such as telework system trials and participation in Telework Days. * The Ministry of Public Management, Home Affairs, Posts and Telecommunications, the Ministry of Health, Labour and Welfare, the Ministry of Economy, Trade and Industry, the Ministry of Land, Infrastructure and Transport, the Cabinet Secretariat and Cabinet Office, the Tokyo prefectural government, and related organizations are collaborating to promote a national work-style reform movement. About 950 organizations and 63,000 people are currently participating. Telework at an external rental office Purpose in Adopting Telework (Basic Policies) Three Action Plans 1 Raising Productivity Raise productivity by autonomously devising work styles and effectively utilizing time 2 Securing Working Power The Company will acknowledge diversity by preparing and offering various options for diverse work styles and secure excellent human resources. It will also prevent turnover due to factors such as childcare and nursing care. 1 Implement (Ongoing) Trials and Conduct Improvement Measures 2 Formulate Guidelines for Promoting Telework 3 Discuss Adoption of a Satellite Office or Offices 70

73 INTEGRATED REPORT 2018 Theme 4 Support for Nursing and Childcare and Promotion of Female Participation Commitment from Top Management Group management is engaging with diverse hierarchies at various operating companies to inform each individual Group employee about the intent behind work-style reforms and to ensure their steady implementation. In March 2018, we exclusively held our fourth Roundtable Discussion with the President for female employees at Sammy, a Group company. This discussion was a precious opportunity to hear concerns regarding childcare, thoughts on female management positions, remarks concerning balancing work responsibilities with child-raising, and requests for internal reviews for telecommuting and telework. Roundtable Discussion with the President Theme 6 Capacity Development through Provision of Educational Opportunities Human Resource Development Aimed at Eliciting Innovation SEGA SAMMY HOLDINGS is continuously introducing systems aimed at eliciting innovation from our employees that serve as the foundation for our competitiveness as an entertainment company, such as an overseas study system and side job systems. Job Plus (JOB+) Side Job System We introduced the Job Plus (JOB+) side job system. This system allows full-time Group employees who have three or more years of continuous service with the Company to obtain side job employment outside of working hours with Company permission. The goal of this system is to raise the Group s corporate value and inspire the creation of new innovation through new skills and experiences acquired while working side jobs. Moving forward, SEGA SAMMY HOLDINGS will actively implement new measures and engage in work-style reforms across the whole Group. Overseas Study System That Provides Employees with the Opportunity to Obtain an MBA at a Foreign Business School We adopted an overseas study system as part of our Global Leadership Training Program to provide employees with the opportunity to acquire their MBAs at foreign business schools. Purpose in Adopting this System 1 Development of human resources capable of moving on to future management positions in preparation for M&As and the strengthening of overseas operations in the intgrated resort and Entertainment contents businesses 2 Offering of autonomous career development opportunities to Group employees 3 Leadership training by providing opportunities for our diverse human resources to experience decision making among themselves and construction of a global-scale human network 71

74 SEGA SAMMY HOLDINGS ESG Risks and Responses in the Value Chain Steps are taken in Group businesses to address the diverse environmental, social, and governance (ESG) risks faced based on the different characteristics of each business market, business model, and value chain. Pachislot and Pachinko Machines Business Planning, development Manufacturing Sales Operation In-house Outsourcing Regulatory revision G Authorities sometimes strengthen the regulations pertaining to the Entertainment Establishments Control Law (the regulations ), which stipulates prototype-testing operation methods for pachinko and pachislot machines, in response to the clarification of operation rules or pachinko and pachislot machine manufacturers development of machines with strong gambling elements. Furthermore, manufacturers must comply with industry bodies internal regulations. For example, the pachinko machine manufacturers industry association, Nikkoso, and the pachislot machine manufacturers industry association, Nichidenkyo, have concluded a new agreement in relation to addiction countermeasures. Response We are focusing on developing machines that a wide range of players can enjoy casually. At the same time, we are supporting and cooperating with industry bodies as part of a concerted effort by the entire industry to prevent addiction and ensure the industry develops soundly. Environmental burden of raw materials and the processing of E recovered and surplus components Sammy s manufacturing processes could give rise to surplus electrical components and other components. We use natural resources, such as wood, and materials that could place a burden on the environment, such as adhesives. Also, processing pachinko and pachislot machines at the end of their service lives is an important responsibility. Response In all business processes, we implement reduce, reuse, and recycle (3R) measures rigorously. At the design and development stages, we establish common components to enable the sharing of surplus components. At the disposal stage, as well as reusing pachislot and pachinko machines that have been removed from pachinko halls and traded in, we use an industry association collection system for the final disposal of machines. Also, in collaboration with suppliers, we promote the use of environment-friendly raw materials through measures such as refraining from using adhesives, including waterbased adhesives. Deterioration of image due to improper modifications or S playing techniques There is concern that the use of improperly modified pachinko and pachislot machines in commercial operations or improper playing techniques could harm the image of pachinko and pachislot, ultimately leading to the contraction of the pachinko and pachislot machine market. Response We coordinate with industry associations in a voluntary drive to collect pachinko and pachislot machines that have been improperly modified. In addition, we have established an office tasked with preventing illegal acts, which gathers market information and contributes to the manufacture of pachinko and pachislot machines that are highly resistant to tampering. We also take measures to urge caution in relation to strategy guides that are unfounded. Entertainment Contents Business Digital games area Planning, development Distribution, sales Operation, additional distribution In-house Outsourcing Excessive use by minors S Customer support S In the digital games market, social problems associated with minors who incur excessive fees when playing games based on the Gacha system, which encourages gambling aspect, are not infrequent. This issue has led to calls for content vendors to take measures. Unlike packaged games, digital games maintain contact between the provider and consumers. Therefore, the provision of ongoing support is necessary. Any shortcomings in such support could harm brands. Response For certain titles, we have applied age authentication to set upper limits on monthly fees. Also, we have established and implemented in-house guidelines to avoid the use of vague terms that can give players overly high expectations and to prevent the charging of excessive fees. Response Normally, we respond to customer inquiries through a player support helpdesk. If needed, however, we establish dedicated helpdesks. In September 2013, when a defect in an online game for PCs became apparent, we immediately disclosed the relevant information, corrected the defect, and established a dedicated helpdesk. 72

75 INTEGRATED REPORT 2018 E Environmental Risk S Social Risk G Governance Risk Amusement machine sales area Planning, development Manufacturing Sales In-house Outsourcing Compliance in relation to procurement The amusement machine sales area has a fabless business model. If we used our advantageous position to conduct unfair business transactions or failed to comply with the applicable laws in relation to labor practices, we could become subject to legal sanctions. Furthermore, failure to conform to the worldwide strengthening of environmental regulations could lead to the rejection of our products. E S G Response The SEGA SAMMY Group strives to establish fair relationships with suppliers based on its Supply Chain Procurement Guidebook and the Group Code of Conduct. For the amusement machine sales area, which has numerous suppliers, we have established a separate AM Material Procurement Policy to ensure rigorously fair business transactions. In addition, we require all suppliers to establish and implement systems for chemicals management based on the SEGA Standards for Device and Product Chemicals. Moreover, we check suppliers establishment and implementation of these systems as part of our efforts to realize appropriate chemicals management. Amusement center operations area Planning, Development Procurement Operation In-house Outsourcing Guidance and development of young people As an operator of amusement centers, we have a social responsibility to take measures in relation to minors that comply with laws prohibiting smoking, restricting access to venues, restricting entry to amusement centers including restaurants that serve alcohol, and prohibiting alcohol consumption. S Response We educate employees based on an operational manual that clarifies how to respond appropriately with regard to restricting minors access to venues and prohibiting smoking. In principle, we prohibit unaccompanied minors from entering amusement centers including restaurants that serve alcohol. If minors enter facilities accompanied by guardians, we strictly prohibit the consumption of alcohol by minors. Resort Business Integrated Resorts Planning Development Management of IR facilities with casinos (overseas) Management of resort complexes without casinos (Japan) Compliance violations Any litigation filed against us or any penalties incurred from regulatory authorities for violations of laws or ordinances may have an impact on our brand image and possibly affect our participation in domestic intgrated resort operations. G Response Under the Group Compliance Liaison Committee, we are working to build a corporate structure that fosters the development of sound corporate management in observance of laws, ordinances, and societal norms. 73

76 SEGA SAMMY HOLDINGS Social Factors Social Factors Relationship between Operational Sustainability, Regulations, and Compliance In the Pachislot and Pachinko Machines Business and in the amusement center operations area, business activities are required to comply with the Act on Control and Improvement of Amusement Business, etc., and internal industrial rules. Criticism from society regarding issues such as addiction have an influence on revisions to these rules and these revisions have a large impact on our business activities and these revisions. Therefore, it is necessary that the Company take part in public outreach initiatives. Compliance is particularly important for our business category and any penalties or litigation incurred due to compliance violations could cause significant damage to our brand image. Countermeasure to Addiction Pachinko and pachislot machines have been a popular source of public entertainment in Japan for many years. However, these machines involve gambling elements and excessive addiction is seen as an important issue. Discussions regarding addiction began when the Society for Research on Pachinko Addiction was formed in The Recovery Support Network (RSN) was established with support from industry groups in 2006 and conducts wideranging problem-solving initiatives such as public outreach and telephone counseling while collaborating with public institutions. The industry is also developing a self-reporting Program that allows customers to set limits on the amounts of money they use in machines. It is also in the process of stationing Secure Pachinko and Pachislot Advisors who provide consultation regarding addiction issues at pachinko halls across Japan. In January 2017, 14 groups from the pachinko and pachislot machine industry (collectively referred to as the 21st Century Pachinko and Pachislot Industry Association ) released their Statement Regarding Issues Involving Pachinko and Pachislot Addiction and announced their commitment to participating in industry-wide addiction countermeasures. The association resolved to strengthen its addiction issue countermeasures in November 2017 with an emphasis on enhancing its support for the RSN. the SEGA SAMMY Group will play a leading role in these types of initiatives and contribute to sound development in the industry. Prevention of Improper Modification and Playing Techniques In response to 2004 revisions to the enforcement of regulations regarding the Entertainment Establishments Control Law, we are promoting initiatives aimed at preventing cheating and other attempts to obtain returns through illicit means in the Pachislot and Pachinko Machines Business. Starting April 2016, pachinko and pachislot machine manufacturers, who had only been responsible for their machines from factory production to shipment, became responsible for their machines until they are actually placed in pachinko halls. Under these circumstances, the Company and industry groups are advancing initiatives geared toward securing product traceability to prevent illegal modifications. Expanding Scope of Responsibility Previously up until shipment Factory Now up until installation Hall Rigorous traceability measures for preventing improper modification Reinforced security during delivery Prevention of Excessive Micro-Transaction Payment The Gacha system has strong gambling elements that can lead to excessive micro-transaction payment. These regulation for the system is getting stricter based on concern for minors being entranced by these gambling dement. Out of consideration for issues regarding excessive game use and micro-transaction payment for minors, we have enabled the use of age authentication systems for certain titles that set upper limits on monthly fees. In addition, we have established in-house guidelines and are working to avoid the use of vague terms that can cause overly high expectations and excessive payment that can result from them. 74

77 INTEGRATED REPORT 2018 Relationship between Partners and Suppliers and Business Sustainability In the Pachislot and Pachinko Machines Business, we are dependent on numerous suppliers. Accordingly, our relationships with suppliers and manufacturing subcontractors can impact the sustainability of our business in areas where we conduct fabless manufacturing, such as packaged games area, amusement machines sales area, and toys area. Moreover, our relationships with partners in invigorating the industry have also been becoming more important in recent years. Fair and Impartial Business Transactions Since fiscal 2016, basic transaction contracts have stipulated our expectations of understanding and adherence with the SEGA SAMMY Group s Supply Chain Procurement Guidebook. In the amusement machine sales area, we request that all suppliers conduct annual self-inspections of their environmental and quality initiatives using check sheets. In addition, procurement representatives visit the sites of major suppliers once a year to perform audits. For purchases in the Pachislot and Pachinko Machines Business segment, we engage in supply chain-spanning purchasing activities based on the Group CSR Charter and the Group Code of Conduct. In fiscal 2018, we performed audits for 96 supplier companies. Working to Eradicate Child and Forced Labor In the Entertainment Contents Business, we are promoting initiatives related to the prohibition of child and forced labor, mainly at overseas factories to which we have outsourced manufacturing. At SEGA Interactive Co., Ltd., we visit factories entrusted with our prize product manufacturing once in every two months to conduct factory checks that include on-site inspections and factory audit by third-party factory that currently cover 92% of our suppliers. SEGA ENTERTAINMENT is working to minimize related risks associated with prize products for amusement centers by conducting surveys regarding slave labor and human trafficking at major suppliers, as well as verifying management conditions of them (Audits currently cover 60% of suppliers). SEGA TOYS CO., LTD., is currently reworking its basic manufacturing agreements to include compliance clauses regarding forced labor and child labor. It is also conducting training related to human rights and third-party checks to confirm if contracting factories have acquired labor standards compliance certificates. Currently, 95% of SEGA TOYS suppliers are covered by these checks. Collaboration with Partners and Competitors The markets are shrinking for the Pachislot and Pachinko Machines Business segment as well as for the amusement machine sales area. It is therefore necessary that we collaborate with competitors in order to invigorate the industry and streamline its structure. In the Pachislot and Pachinko Machines Business segment, Sammy and Universal Entertainment Corporation established ZEEG Co. Ltd. as a joint venture to engage in cabinet development and joint parts purchasing. Efforts in the amusement machine sales area include sales of PFU Limited s multi-e-money system for amusement machines, which allows for transportation and other e-money cards to be charged with a single device. Targeting amusement facilities nationwide, these sales are being conducted through collaboration with Konami Digital Entertainment Co., Ltd. 75

78 Environment Fact Environmental Factors SEGA SAMMY HOLDINGS Relationship between Natural Capital and Business Sustainability The Pachislot and Pachinko Machines Business segment operates the Group s only business in which hardware is produced in-house. Accordingly, this business consumes various natural resources in its use of components and in its manufacturing processes. It is therefore necessary to take steps to reduce the environmental impact of our manufacturing processes, and, given the relatively short lifecycles of our products, we must also stringently manage waste. Reduction of Environmental Impact and Improvement of Profitability in the Pachislot and Pachinko Machines Business The SEGA SAMMY Group is pursuing optimization in all areas of the pachinko and pachislot machine value chain, including development, manufacturing, and sales. Through these efforts, we aim to reduce environmental impact by cutting back on component use while also improving profitability by reusing components. The range of components to which these initiatives apply is being expanded and we are also increasingly the rate of using common components. In addition, we are promoting these initiatives in the industry as a whole. We thereby aim to lead the industry in improving efficiency. Promotion of Reuse across the Value Chain Reuse Design and Development At the design and development stages, we are promoting common com ponents, increasing the range of components that are reused, and designing products with reuse in mind. Production At the production stage, previously dispersed component warehouse functions are being consolidated at the site of the neighboring Kawagoe Factory in order to facilitate efficient component recycling and reuse. Sales We sell pachinko machine boards designed to help reduce investments when introducing new machines in order to strengthen relationships with pachinko halls and establish a cycle of reuse and recycling. Waste Disposal The Group seeks to ensure proper disposal of used pachinko and pachislot machines that have reached the end of their lives of bringing joy to customers. We therefore promote recycling by offering trade-in programs with regard to our own machines and by utilizing an industry association collection system. We also participate in the used pachinko and pachislot machine collection system developed by industry associations to implement more advanced recycling measures (reduction of weight and appropriate treatment). Environmental Indicators at Sammy s Kawagoe Factory (FY) Pachinko and pachislot machine recycle rate Use of environment-friendly raw materials Recycle rate 97.28% 97.21% 95.99% Amount of wood used 1,077 t 1,494 t 566 t Of which, PEFC-certified wood* 45 t (4.2%) 84 t (5.6%) 38 t (6.8%) * PEFC-certified wood: This refers to wood certified by the Programme for the Endorsement of Forest Certification. This wood is appropriately procured from forests that have received third-party certification as sustainably managed forests. Our use of PEFC-certified wood has declined due to a decrease in the volume of products that we manufacture for which PEFC-certified wood is usable. In fiscal 2014, we changed over to procuring bonded components. All of the components we procure use water-based adhesives, which place less burden on the environment. Components glued together using environmentally-friendly water-based adhesives have been purchased from suppliers since fiscal

79 ors INTEGRATED REPORT 2018 Group Environmental Management System The SEGA SAMMY Group conducts a wide range of businesses that extends from product manufacturing to facility management and believes that it must comprehend the environmental impact of all its business activities in order to reduce them. With this in mind, we gather, tabulate, and contextualize basic environmental data from our principal business locations and facilities and evaluate our progress on environmental impact. Moving forward, we will continue to actively promote the efficient use of lighting and air conditioning as well as conversion to energy-saving equipment in order to reduce our electrical power usage. Environment-Conscious Product Design We are conducting ongoing energy conservation initiatives in the Entertainment Contents Business. Our token-operated game machine, The Medal Tower of Babel, uses 55% less energy than conventional machines, and we have designed our current amusement machines to have components that can be reused in later products in an effort to reduce waste. Sega Logistics Service Co., Ltd., manually disassembles and completely recycles the parts of discarded machines from amusement centers. Sega Logistics Services is achieving its goals of zero landfill waste and zero unnecessary waste incineration by inviting intermediary industrial waste disposal contractors to its business locations to reduce disposal costs and by rolling out a nationwide recycling system that prevents illegal waste dumping. In the Pachislot and Pachinko Machines Business, the Group is working to raise the reusability of parts collected through machine trade-ins by standardizing machine parts, circuit boards, and components from the design and development stages. We are also establishing numerical targets for parts that can be reused over the medium term and promoting its expansion. The Medal Tower of Babel SEGA Proper Management of Products Containing Potentially Hazardous Chemicals SEGA Interactive, which is involved with the Group s Entertainment Contents Business, requires all of our suppliers to build and apply a Management System for Products Containing Potentially Hazardous Chemicals based on the SEGA Standards for Device and Product Chemicals. Suppliers conduct self-inspections on their systems and report results to us. We then visit our suppliers manufacturing bases to verify progress on the construction and application of their management systems. Through these efforts, we are working to secure proper management of products containing potentially hazardous chemicals throughout our supply chain. 77

80 患児が滞在しながら外来治療されることがあり 感染症に気を付けているので新しいおもちゃが大変有難いです 子どもたちの喜ぶ顔を想像しながら各ハウスに必要な数を配分して届けています ちいさいお子さんがたくさんいらっしゃるハウスです ハウスに着いてすぐにおもちゃがあるとたいへん喜ばれます 東京女子医科大学病院から歩いて行けるハウス 患児のきょうだいも滞在できるので ハウスで過ごすのにおもちゃは必須です Social Contribution Social Contributions SEGA SAMMY HOLDINGS Making Life More Colorful The SEGA SAMMY Group conducts ongoing fund-raising, donation activities and the activities to deliver moving experiences with the power of entertainment to areas stricken by natural disasters, such as the 2011 Great East Japan Earthquake and the 2016 Kumamoto Earthquakes. The Group is also searching for ways in which it can offer unique contributions to society as Japan s population rapidly ages. Group Employee Volunteer Work and Events Supporting Disaster-Stricken Areas Under the theme of delivering smiles and well-being through entertainment, volunteer Group employees have been continuously holding support events for areas affected by the Great East Japan Earthquake since June In addition to beach cleanings, support for the fishing industry and temporary housing assistance, the SEGA SAMMY Group holds various events using its diverse products and services, including events featuring celebrities. We also incorporate visits to disaster-stricken areas into training for new Group employees. On top of its support activities, the Company is performing Group works, such as publishing reconstruction measures, that inspire a will to contribute to society. We will make use of this will in our future endeavors. Toy Donation SEGA SAMMY Group are donating toys and goods for children of its operating companies to nonprofit organizations (NPOs) that the Company selects in collaboration with the Japan NPO Center, a certified specific non-profit corporation. We have been conducting this charitable initiative since fiscal 2010 and are now welcoming our ninth set of donations. In fiscal 2018, the Group donated about 50 products from SEGA TOYS to Family House, an authorized NPO that provides resident support for families raising children with pediatric cancer or incurable diseases. Additionally, Group employees regularly visit accommodations for these children and, along with general volunteers, sterilize and mend stuffed toys. ご寄付頂いたおもちゃは 生後まもなく入院や手術をする患児だけでなく きょうだいが入院していて親御さんと離れていなくてはならない弟や妹達にも差し上げています ちいさいお子さんにはアンパンマンがとても人気で 目を輝かせて受け取ってくれました 図鑑は読むところが多く お母さんとのコミュニケーションにも役立ちます また 動くおもちゃは赤ちゃんにとってたのしい世界を届けてくれました つらい治療生活の中でも楽しみがあることはたいへんな励みになります 本当にありがとうございました 2018 年 4 月 ひつじさんのおうち かちどき橋のおうち ファミリーハウス事務局 余丁町のおうち Contributing to an Aging Society through Entertainment Sammy Corporation invites visitors from facilities for the elderly to enjoy its pachinko and pachislot machines along with volunteer Group employees once or twice per month. We started this activity on June 27, 2006 in response to an employee s suggestion and have held 247 events as of March We continue to engage in this activity as it offers us opportunities to provide social value to Japan s aging society through entertainment. 78

81 INTEGRATED REPORT 2018 Non-Financial Data Years ended March 31 CO2 Emissions t-co2 Total Energy Input GJ Industrial Waste Discharged t 18 93, ,897, , ,832, , , ,050, , , ,216, , , ,262, ,575 (FY) (FY) (FY) Number of New Graduates People Number of Mid-Career Recruits People Number of Female Management- Level Staff / Percentage of Female Management-Level Staff People % % % % % (FY) Male Female (FY) Male Female (FYE) Number of female management-level staff Percentage of female management-level staff Number of Physically Challenged Employees Number of Employees Who Have Taken Childcare Leave Number of Days of Paid Leave Taken People People Days (FY) (FY) (FY) 79

82 SEGA SAMMY HOLDINGS Corporate Governance Corporate Gov Corporate Governance System Fiscal 2006 Initiated internal control project Aim: Strengthen internal control from Groupwide perspective Fiscal 2008 Appointed external director Aim: Strengthen monitoring and oversight of business management and reflect wealth of insight in business management Fiscal 2009 Increased external directors to two Aim: Strengthen monitoring and oversight of business management and reflect wealth of insight in business management Fiscal 2010 Established Group Compliance Liaison Committee Aim: Establish J-SOX compliant internal control system Strengthen continuously Fiscal 2017 Established position of CFO, increased external directors to three, and disclosed action plan for achieving medium-term performance targets Aim: Provide financial support for growth strategies and strengthen communication with capital markets Fiscal 2016 Established Independent Advisory Committee, assessed effectiveness of the Board of Directors, and disclosed medium-term management strategy and targeted management indicators Aim: Exchange information to receive opinions on significant management issues, and ensure oversight of the Board of Directors, bolster functions of directors, promote accountability to capital markets and strengthen Group management Composition of External Directors Internal Directors Periods of Service (As of August 2018) More than 10 years 2 More than 5 years 1 More than 2 years 2 Internal directors External directors 63% 37% Less than 1 year 0 Careers of External Directors Compensation of Directors (SEGA SAMMY HOLDINGS non-consolidated) () IT companies, etc. External directors Internal directors FY Total External Directors Retail FY Financial institutions FY

83 ernance INTEGRATED REPORT 2018 Overview of Governance Structure The SEGA SAMMY Group has adopted an Audit and Supervisory Board member system to enable directors to make prompt, optimal decisions amid volatile business conditions based on their wealth of expertise and experience regarding the industry, market trends, products, merchandise, and services. At the same time, we have appointed external directors and strengthened our executive officer system and internal auditing system, thereby reinforcing corporate governance with respect to operational management and oversight. Comprising eight directors, the Board of Directors strives for agile business management. It convenes once a month in principle, holding extraordinary sessions as required. Comprising four members, the Audit and Supervisory Board thoroughly examines and analyzes specific issues. It meets once a month and holds extraordinary sessions as required. The SEGA SAMMY Group has established voluntary committees the Group Management Strategies Committee and the Independent Advisory Committee as well as the Group Compliance Liaison Committee, the Group Audit Liaison Committee, the Holdings Audit Liaison Committee, and the Audit and Supervisory Board Members and Internal Auditing Office Liaison Committee. These committees were established to facilitate intra-group information sharing, discussion, verification, and coordination, and they are also tasked with issuing reports and making proposals to the Board of Directors. Furthermore, the Company has adopted an executive officer system with the aim of expediting management decision making and enhancing operational implementation and related oversight functions. Corporate Governance System (As of June 30, 2018) General Meeting of Shareholders Election / Dismissal Election / Dismissal Reports / Proposals Election / Dismissal Reports Determination of Election / Dismissal Proposal of Accounting Auditor Supervision Evaluation Independent Auditor Reports Board of Directors Audit and Supervisory Board Audit / Audit Reporting / Exchange of Information Instructions by President Election / Dismissal Execution Instructions Audit Officer of Audit & Supervisory Board Members Reports Internal Auditing Office Internal Audit / Reports / Advice Reports Executive Officers Reports / Proposals Advance Deliberations / Instructions for Examination Voluntary Committees Group Management Strategies Committee Independent Advisory Committee Reports / Proposals Liaison Committees Compliance Advice / Exchange of Information Reports / Exchange of Information Group Audit Liaison Committee Holdings Audit Liaison Committee Audit and Supervisory Board Members and Internal Auditing Office Liaison Committee Implementation Policies Reports / Proposals Exchange of Information Notification Channel Various Consultation Channels Implementation of Policies Reports / Proposals / Exchange of Information Specific Execution Instructions Each Division Group Companies 81

84 SEGA SAMMY HOLDINGS External Directors and Audit and Supervisory Board Members The Company has eight directors, three of whom are external directors and independent directors, as well as four Audit and Supervisory Board members, two of whom are outside Audit and Supervisory Board members and independent directors. At the various meetings that they attend, external directors and outside Audit and Supervisory Board members provide guidance and advice based on their abundant experience and highly specialized knowledge. Reason for Appointment of External Directors Corporate manager (financial institutions) To reflect Mr. Katsukawa s wealth of experience and extensive expertise as a business executive in the Company s business management Kohei Katsukawa Takeshi Natsuno Hiroshi Onishi Corporate Manager (Retail) To reflect Mr. Onishi s wealth of experience and extensive expertise as a business executive in the retail and department store industry in the Company s business management Selection Policy External directors provide advice on raising the corporate value of the Company and the Group from an external perspective, based on their extensive expertise and experience. Aiming to enable the oversight of directors implementation of operations, we appoint external directors from among business executives. We appoint outside Audit and Supervisory Board members with extensive expertise and experience in a wide range of areas because we appreciate the important role outside Audit and Supervisory Board members perform in realizing corporate governance by heightening the impartiality and independence of the auditing system. Also, we aim to ensure the soundness of business management through auditing from an objective standpoint. Policy Regarding Independence Regarding the independence of external directors and external Audit and Supervisory Board members, the Company determines based on significant business partners or large monetary amounts, which are cited in the independence criteria stipulated by the Tokyo Stock Exchange (TSE), with reference to the publicly announced standard model for appointing independent directors and based on said criteria. We deem that persons satisfying the requirements of the said criteria do not have conflicts of interest with general shareholders. The Company has adopted a policy of appointing all independent directors as external directors and outside Audit and Supervisory Board members that meet the independence criteria stipulated by the TSE. Accordingly, we have designated all currently serving external directors and outside Audit and Supervisory Board members as independent directors. Independent Advisory Committee The Independent Advisory Committee comprises all of the Company s independent external directors and independent outside Audit and Supervisory Board members. In response to consultation by the Board of Directors or the chief executive officer, the Independent Advisory Committee provides opinions from an independent standpoint that primarily relate to analyses and assessments of the effectiveness of the Board of Directors as a whole; involvement in the decision-making process for compensation; and assessments of candidates for the positions of director or Audit and Supervisory Board member. Outside Audit and Supervisory Board Members Tomio Kazashi Mineo Enomoto Corporate manager (IT companies, etc.) Reason for Appointment of Outside Audit and Supervisory Board Members Activity in Fiscal 2018 Board of Directors Board of Directors convened External directors Yuji Iwanaga Takeshi Natsuno Kohei Katsukawa External directors attendance Outside Audit & Supervisory Board members Tomio Kazashi Mineo Enomoto Outside Audit & Supervisory Board members attendance To reflect Mr. Natsuno s wealth of experience and extensive expertise as a business executive in the Company s business management Reason for Appointment To reflect Mr. Kazashi s wealth of expertise and practical experience in business and as an Audit and Supervisory Board member in the Company s auditing To reflect Mr. Enomoto s expert perspective as an attorney and extensive expertise in relation to business management in the Company s auditing Meeting Attendance 14 times Attended 14 of 14 meetings (including 12 of 12 ordinary Board of Directors meetings) Attended 13 of 14 meetings (including 11 of 12 ordinary Board of Directors meetings) Attended 13 of 14 meetings (including 11 of 12 ordinary Board of Directors meetings) 95% Attended 14 of 14 meetings (including 12 of 12 ordinary Board of Directors meetings) Attended 12 of 14 meetings (including 10 of 12 ordinary Board of Directors meetings) 93% 82

85 INTEGRATED REPORT 2018 Message from a Newly Appointed External Director Hiroshi Onishi My name is Hiroshi Onishi, and I was recently appointed as an outside director. Until now, I was engaged in management for many years in the retail and department store industry. In the retail and department store industry, amid contraction in the industry overall, we emphasized workplace skills while repeatedly taking on challenges and engaging in innovation to break down notions of common sense and existing frameworks. In the entertainment industry as well, end-user preferences are undergoing dramatic changes and the SEGA SAMMY Group is taking on the challenge of innovations that do not follow conventions of the past. I will make full use of my experience up to now, limited though it may be, and work diligently to transform the SEGA SAMMY Group and enhance its corporate value with the intention of meeting the expectations of shareholders and all other stakeholders. Assessment of the Effectiveness of the Board of Directors The Independent Advisory Committee analyzes and assesses the Board of Directors as a whole with respect to its size, composition, management method, deliberations, and support systems as well as other matters that are important for the effective performance of roles and duties by the Board of Directors. In fiscal 2018, each director responded to a questionnaire. In light of these responses, the Independent Advisory Committee conducted an assessment and reported that the effectiveness of the Company s Board of Directors was being maintained at an ordinary Board of Directors meeting convened at the end of May The Independent Advisory Committee favorably evaluated measures to encourage in-depth discussions of matters, which included creating opportunities to discuss important matters in advance of Board of Directors meetings. At the same time, the Committee recommended that (a) thorough feedback be provided with regard to remarks and opinions provided during advance discussions and that (b) explanations of matters already explained beforehand at Board of Directors meetings be streamlined to ensure adequate time for deliberation in order to ensure effective management. In light of this effectiveness assessment, the Board of Directors will improve its functions and effectiveness. Compensation of Directors The Company pays basic compensation to directors (excluding external directors) commensurate with the significance of their positions and the scope of their duties and responsibilities. Also, the Company pays variable compensation, comprising bonuses and stock options, in light of its business results in the relevant fiscal year. The president indicates the basic policy on the determination of compensation to the Board of Directors. Based on delegation through a resolution of the Board of Directors, the president consults with the Independent Advisory Committee regarding the assessment of each director. The committee assesses directors and the Board of Directors based on the achievements of each director. The committee submits an opinion to the president based on the results. With reference to the committee s opinion, the president determines an amount of compensation that is within the limit that the Ordinary General Meeting of Shareholders has approved for compensation* and reports the decision to the Board of Directors. * A resolution of the Ordinary General Meeting of Shareholders in June 2012 set the limit for directors compensation at 1 billion. A resolution of the Ordinary General Meeting of Shareholders of Sammy Corporation and a resolution of the Ordinary General Meeting of Shareholders of SEGA CORPORATION in June 2004 set the limit for Audit and Supervisory Board members compensation at 50 million. Compensation of directors and Audit and Supervisory Board members for fiscal 2018 is as follows. Position Directors / Audit and Supervisory Board members Total compensation () Total compensation by type () Basic compensation Bonus Stock options Directors Internal Outside Audit and Internal Supervisory Board members Outside The compensation paid to directors who received 100 million or more in consolidated compensation for fiscal 2018 is as follows. Name Position Total consolidated compensation, etc. () Company Total consolidated compensation by type () Basic compensation Bonus Stock options Hajime Satomi Director 458 The Company Haruki Satomi Director 196 The Company Sammy 36 SEGA Holdings 12 SEGA Games 6 Sammy Networks 6 83

86 SEGA SAMMY HOLDINGS Nomination of Directors and Audit and Supervisory Board Members In determining candidates for the positions of director and Audit and Supervisory Board member, the Company s basic policy is to conduct a comprehensive assessment of their personal qualities, expertise, knowledge, capabilities, and experience. The Independent Advisory Committee considers the candidates that the president has nominated, interviews the candidates, and submits an opinion based on assessment results to the president. With reference to these assessment results and in accordance with the abovementioned policy, the president determines candidates for the position of director or Audit and Supervisory Board member, and the Board of Directors examines and approves the candidates. The same procedure is followed if the Independent Advisory Committee recommends a candidate to the president for the positions of director or Audit and Supervisory Board member. Training of Directors and Audit and Supervisory Board Members When appointing a director or Audit and Supervisory Board member, the Company conducts an orientation about its systems and provides opportunities to participate in training aimed at the acquisition of knowledge about the roles and duties that a director or Audit and Supervisory Board member of a listed company is expected to fulfill as well as about related laws and regulations and compliance. After appointing a director or Audit and Supervisory Board member, the Company continuously provides opportunities for them to acquire required knowledge. For example, after meetings of the Board of Directors the Company holds workshops, which are conducted by outside lecturers who are lawyers or specialists in particular fields. Also, the Company encourages self-improvement by supporting participation in outside seminars or workshops. Shares Held for Strategic Reasons In addition to shares it holds purely as investments, the Company holds shares to enable the expansion of operational alliances and business transactions and thereby enhance corporate and shareholder value. Meetings of the Board of Directors regularly verify economic rationality and outlooks in relation to such shares and consider the pros and cons of holding the shares going forward. In exercising voting rights associated with the shares, the Company s criterion is whether proposals will contribute to the sustained growth of the Company and the investee and thereby enhance corporate value over the medium-to-long term. Transactions with Related Parties Transactions between the Company and directors or between the Company and companies under the effective control of directors that would constitute a conflict of interest or competition with the Company require approval through a resolution of the Board of Directors pursuant to laws and regulations. Further, in securities reports the Company discloses transaction conditions and policies on the determination of transaction conditions. The Company has established systems to ensure that transactions with directors or companies under the effective control of directors and transactions with customers that are major shareholders do not disadvantage the Company. Internal Control In addition, an internal control project launched in fiscal 2006 established an assessment and reporting framework for internal control in accordance with the stipulations of Japan s Financial Instruments and Exchange Act, which requires Management Assessment and Audit concerning Internal Control Over Financial Reporting (J-SOX). Also, the Company has rectified deficiencies that the project identified. As a result, systems to ensure the reliability of financial reports have become firmly established in the Group. We believe that internal controls operated effectively in relation to the financial reports the Group issued for fiscal As we continue to ensure the reliability of financial reports, we will maintain and build internal control systems to increase efficiency and ensure soundness. For details, please see Our Stance and Status on the Corporate Governance Code on our corporate website: 84

87 INTEGRATED REPORT 2018 Compliance Based on the Group Code of Conduct and the Group Management Policy, the SEGA SAMMY Group is undertaking a variety of initiatives to ensure that all employees are aware of compliance and to enable them to act appropriately. Furthermore, having identified loss risks within and outside the scope of its business management and clarified the tasks it should address, the Group implements operations, minimizes the loss of management resources, and prevents recurrence. Because inculcating the Group Code of Conduct among employees is important to our compliance program, we distribute a CSR guidebook to employees that includes the Group Mission, the Group Management Philosophy, and the Group CSR Charter. Employees can also view these and the Group Management Policy on the Company s intranet. Compliance Promotion Structure Established in fiscal 2010 to strengthen initiatives throughout the Group, the Group Compliance Liaison Committee spearheads efforts to build internal structures that enable sound management in accordance with statutory laws and regulations and social norms. Also, the Company is developing and implementing Groupwide initiatives. These include continuation of Compliance Advancement Initiatives, which it began in fiscal 2010, and informing employees about a comprehensive revision of the whistleblower system to ensure operational duties are performed appropriately. Informing Employees about the Group Code of Conduct and Other Commitments The SEGA SAMMY Group complies rigorously with corporate ethics and statutory laws and regulations by ensuring all employees of the Group understand the Group CSR Charter and by providing guidance on conduct and performance of duties consistent with the spirit of this charter in the Group Code of Conduct and the Group Management Policy. Whistleblower System The Group has established a whistleblower system to enable selfcorrection within the Group and to prevent scandals due to illegal or unfair practices. Each Group company has established a whistleblower system and a contact point at an external law office. The Group investigates reported matters, rectifies them, and takes measures to prevent recurrence of such issues. Also, the Group has established a system that protects whistleblowers and uses its intranet and posters to inform all employees about the system. In fiscal 2017, the Group introduced a whistleblower system to overseas operations. In Japan, the whistleblower system responded to 21 cases in fiscal 2015, 9 in fiscal 2016, 16 in fiscal 2017, and 19 in fiscal Breaking down whistleblower reports between fiscal 2014 and fiscal 2018, suspected power harassment cases accounted for 35% of reports, suspected rule or law violation cases 25%, suspected sexual harassment cases 12%, employment-related cases 8%, and other cases 20%. As for the whistleblowers, 52% were employees; 15% were part-time or temporary personnel; 8% were retirees, family members, or business partners; and 25% were unknown due to anonymous reporting. Communication with Shareholders and Other Investors The Company has defined its basic stance toward information disclosure described in its Investor Relations Policy. Based on this stance, the director in charge of the Finance & Accounting Division, who is also responsible for information management, guides the Investor Relations Department within the Finance & Accounting Division in conducting information disclosure. The disclosure activities of this specialized organization are advanced in accordance with the Financial Instruments and Exchange Act and other laws and ordinances as well as the Regulations Governing the Timely Disclosure of Corporate Information by Issuer of Listed Securities set forth by the TSE. In addition to information disclosure mandated by laws or the abovementioned timely disclosure regulations, the Company also conducts proactive voluntary disclosure of information with the potential to significantly influence the decisions of investors. Further, we participate in conferences that securities companies organize. In addition, the Company continually takes measures to further investors understanding of its business activities. For example, we are increasing and improving the investor relations-related materials available on our corporate website. Moreover, our web site has a section for individual investors that includes readily understandable explanations of the Group. Furthermore, the Company endeavors to heighten the objectivity of its business management by reflecting valuable opinions and requests received from shareholders and investors in its business management. 85

88 SEGA SAMMY HOLDINGS Directors, Audit and Supervisory Board Members, and Executive Officers (As of June 22, 2018) Directors Hajime Satomi Chairman and Group CEO (Representative Director) Haruki Satomi President and Group COO (Representative Director) Naoya Tsurumi Senior Executive Vice President (Director of the Board) 1980 President (Representative Director) of Sammy Industry Co., Ltd. (now Sammy Corporation) 2004 Chairman of the Board (Representative Director) of SEGA CORPORATION (now SEGA Games Co., Ltd.) Chairman and CEO (Representative Director) of Sammy Corporation Chairman and CEO (Representative Director) of SEGA CORPORATION (now SEGA Games Co., Ltd.) Chairman, President and CEO (Representative Director) of the Company 2007 President, CEO and COO (Representative Director) of SEGA CORPORATION (now SEGA Games Co., Ltd.) 2008 Chairman and CEO (Representative Director) of the above 2012 Chairman of the Board of Sammy Corporation Chairman of the Board of PHOENIX RESORT CO., LTD Chairman and CEO (Representative Director) of Sammy Corporation 2015 Chairman and CEO (Representative Director) of SEGA Holdings Co., Ltd Chairman, President, CEO and COO (Representative Director) of the Company 2017 Chairman and CEO (Representative Director) of the Company Chairman of the Board (Representative Director) of Sammy Corporation (current position) Honorary Chairman of the Board of SEGA Holdings Co., Ltd. (current position) Chairman of the Board of MARZA ANIMATION PLANET INC. (current position) 2018 Chairman and Group CEO (Representative Director) of the Company (current position) Senior Advisor (Director of the Board) of PHOENIX RESORT CO., LTD. (current position) 2004 Joined Sammy Corporation 2005 Joined SEGA CORPORATION (now SEGA Games Co., Ltd.) Director of SEGA of America, Inc Senior Vice President (Director of the Board) of Sammy Networks Co., Ltd President and CEO (Representative Director) of the above Senior Vice President (Director of the Board) of the Company Senior Vice President (Director of the Board) of SEGA CORPORATION (now SEGA Games Co., Ltd.) President and CEO (Representative Director) of SEGA Networks Co., Ltd. (now SEGA Games Co., Ltd.) 2014 Senior Vice President (Director of the Board) of Sammy Corporation Deputy COO (Representative Director) of SEGA CORPORATION (now SEGA Games Co., Ltd.) 2015 Deputy COO (Representative Director) of SEGA Holdings Co., Ltd. President and CEO (Representative Director) of SEGA Games Co., Ltd. Deputy COO (Representative Director) of Sammy Corporation 2016 President and COO (Representative Director) of the above Chairman of the Board (Representative Director) of Sammy Networks Co., Ltd. (current position) Executive Vice President (Director of the Board) of the Company 2017 President and COO (Representative Director) of the Company President and CEO (Representative Director) of Sammy Corporation (current position) Chairman and CEO (Representative Director) of SEGA Holdings Co., Ltd. (current position) Chairman and CEO (Representative Director) of SEGA Games Co., Ltd. (current position) 2018 President and Group COO (Representative Director) of the Company (current position) Chairman of the Board of PHOENIX RESORT CO., LTD. (current position) 1992 Joined SEGA Enterprises, Ltd. (now SEGA Games Co., Ltd.) 2004 Vice President, Executive Officer of SEGA CORPORATION (now SEGA Games Co., Ltd.) 2005 CEO of SEGA Publishing Europe Ltd Vice President, Senior Executive Officer of SEGA CORPORATION (now SEGA Games Co., Ltd.) CEO and President of SEGA Holdings U.S.A., Inc. Chairman of SEGA of America, Inc Senior Vice President (Director of the Board) of SEGA CORPORATION (now SEGA Games Co., Ltd.) 2009 Executive Vice President (Director of the Board) of the above Chairman of SEGA Europe Ltd President and COO (Representative Director) of SEGA CORPORATION (now SEGA Games Co., Ltd.) Vice Chairman and CEO of Sega Jinwin (Shanghai) Amusements Co., Ltd. Senior Vice President (Director of the Board) of the Company CEO and President of SEGA Holdings Europe Ltd Senior Executive Vice President (Representative Director) of the Company Vice Chairman of the Board of SEGA CORPORATION (now SEGA Games Co., Ltd.) Vice Chairman of the Board of PHOENIX RESORT CO., LTD. (current position) Member of the Board of Directors of PARADISE SEGASAMMY Co., Ltd Vice Chairman of the Board of SEGA Holdings Co., Ltd. Chairman, Representative Director and President of SEGA LIVE CREATION Inc. (now CA Sega Joypolis Ltd.) Chairman of the Board of Sega Sammy Golf Entertainment Inc. (current position) 2016 Senior Executive Vice President (Director of the Board) of the Company (current position) 2017 Chairman and Director of CA Sega Joypolis Ltd. (current position) Senior Executive Vice President of PARADISE SEGASAMMY Co., Ltd. (current position) External Directors Takeshi Natsuno* Director of the Board (External) Kohei Katsukawa* Director of the Board (External) 2005 Executive Officer and General Manager of Multimedia Services Department of NTT Mobile Communications Network, Inc. (now NTT DOCOMO, Inc.) 2008 Director of the Board (External) of the Company (current position) Outside Director of transcosmos inc. (current position) Director of DWANGO Co., Ltd. (current position) Director of NTT Resonant Inc. (current position) Guest Professor, Graduate School of Media and Governance of Keio University 2009 Outside Director of DLE, Ltd. (current position) Outside Director of GREE, Inc. (current position) 2010 Outside Director of U-NEXT Co., Ltd. (Now USEN-NEXT HOLDINGS Co., Ltd.) (current position) 2013 Guest Professor, Graduate School of Media and Governance of Keio University (current position) 2016 Outside Director of Oracle Corporation Japan (current position) 2017 Outside Director of AWS Holdings (now Ubicom Holdings) (current position) Outside Director of GENETEC CORPORATION (current position) Outside Director of Cool Japan Fund Inc. (current position) 1974 Joined Sumitomo Bank (now Sumitomo Mitsui Banking Corporation) 2001 Executive Officer, Head of Osaka Corporate Banking Division II of Sumitomo Mitsui Banking Corporation 2005 Managing Executive Officer, Deputy Head of Wholesale Banking Unit (in charge of East Japan) of the above 2007 Executive Vice President and Representative Director of NIF SMBC Ventures Co., Ltd. (now SMBC Venture Capital Co., Ltd.) 2010 President and Representative Director of SMBC Venture Capital Co., Ltd President and Representative Director of GINSEN Co., Ltd. Outside Director of Kyoto University Innovation Capital Co., Ltd. (current position) 86

89 INTEGRATED REPORT 2018 Koichi Fukazawa Executive Vice President and Group CFO (Director of the Board) Hideki Okamura Executive Vice President (Director of the Board) 2003 Joined Sammy Corporation Vice President, Executive Officer and Managing Director of President s Office of the above 2004 Vice President, Executive Officer and Managing Director of President s Office of the Company Vice President, Executive Officer and Managing Director of Chairman s Office and President s Office of SEGA CORPORATION (now SEGA Games Co., Ltd.) 2005 Senior Vice President (Director of the Board) and Managing Director of Chairman s Office and President s Office of the above 2007 President (Representative Director) of SEGA SAMMY ASSET MANAGEMENT INC. (now MARZA ANIMATION PLANET INC.) Senior Executive Officer and in charge of the Corporate Strategy and External Affairs of the Company 2008 Senior Vice President (Director of the Board) and Managing Director of New Business Division of SEGA CORPORATION (now SEGA Games Co., Ltd.) 2009 President (Representative Director) of SEGASAMMY VISUAL ENTERTAINMENT INC. (now MARZA ANIMATION PLANET INC.) 2014 Senior Executive Vice President (Representative Director) of SEGA TOYS CO., LTD Senior Vice President (Director of the Board) of the above Senior Vice President (Director of the Board) of the Company 2016 Executive Vice President and CFO (Director of the Board) of the Company 2018 Executive Vice President and Group CFO (Director of the Board) of the Company (current position) 1987 Joined SEGA Enterprises, Ltd. (now SEGA Games Co., Ltd.) 1997 Senior Vice President (Director of the Board) of the above 2003 Vice President, Senior Executive Officer of SEGA CORPORATION (now SEGA Games Co., Ltd.) 2004 Director of the Board of TMS ENTERTAINMENT CO., LTD. Executive Vice President (Director of the Board) of SEGA CORPORATION (now SEGA Games Co., Ltd.) Senior Vice President (Director of the Board) of the Company 2007 Senior Vice President (Director of the Board) of SEGA CORPORATION (now SEGA Games Co., Ltd.) 2008 President (Representative Director) of TMS ENTERTAINMENT CO., LTD Vice Chairman of the Board of the above President and COO (Representative Director) of SEGA CORPORATION (now SEGA Games Co., Ltd.) Senior Vice President (Director of the Board) of the Company 2015 President and COO (Representative Director) of SEGA Holdings Co., Ltd. (current position) Chairman of the Board (Representative Director) of SEGA Games Co., Ltd. Chairman of the Board of SEGA Interactive Co., Ltd. (current position) Chairman of the Board (Representative Director) of TMS ENTERTAINMENT CO., LTD. (current position) Chairman of the Board (Representative Director) of SEGA TOYS CO., LTD. (current position) Chairman of the Board (Representative Director) of MARZA ANIMATION PLANET INC. Chairman of the Board (Representative Director) of DARTSLIVE Co., Ltd. (current position) President (Director of the Board) of SEGA ENTERTAINMENT Co., Ltd Executive Vice President (Director of the Board) of the Company (current position) Senior Vice President (Director of the Board) of SEGA Games Co., Ltd. (current position) President (Representative Director) of MARZA ANIMATION PLANET INC. (current position) Chairman of the Board of SEGA ENTERTAINMENT Co., Ltd. (current position) Hiroshi Onishi* Director of the Board (External) 2016 Director of the Board (External) of the Company (current position) Special Advisor of GINSEN Co., Ltd. (current position) Outside Director of ELECOM CO., LTD. (current position) 2017 Director of DX ANTENNA CO., LTD. (current position) 1979 Joined Isetan Co., Ltd. (now Isetan Mitsukoshi Ltd.) 2005 Executive Officer, Manager, General Planning Section, Management Planning Department of the above 2009 President, Representative Director and Executive Officer of Isetan Co., Ltd. (now Isetan Mitsukoshi Ltd.) 2010 Director of Isetan Mitsukoshi Holdings Ltd President, Representative Director, Executive Officer and Division Manager / Department Store Business Planning & Operation Headquarters of Isetan Mitsukoshi Ltd President, Representative Director and Executive Officer of Isetan Mitsukoshi Holdings. Ltd. President, Representative Director and Executive Officer of Isetan Mitsukoshi Ltd Chairman of Japan Department Stores Association 2017 Director of Isetan Mitsukoshi Holdings. Ltd Director of the Board (External) of the Company (current position) Executive Vice President of Japan Airport Terminal Co., Ltd. * Qualified external director as provided in Paragraph 2, Clause 15 of the Companies Act of Japan 87

90 SEGA SAMMY HOLDINGS Audit and Supervisory Board Members Shigeru Aoki Standing Audit & Supervisory Board Member Yukito Sakaue Audit & Supervisory Board Member Tomio Kazashi* Audit & Supervisory Board Member (External) Mineo Enomoto* Audit & Supervisory Board Member (External) 2005 Joined SEGA CORPORATION (now SEGA Games Co., Ltd.) as Head Councilor Vice President, Executive Officer and Managing Director of Office of China and Asia Business Management of the above 2006 President of Sega Networks (China) Co., Ltd Vice President, Executive Officer and Managing Director of Business Administration Department of Sammy Corporation Vice President, Executive Officer and Managing Director of Corporate Division of the above 2009 Senior Vice President (Director of the Board) and Managing Director of Corporate Division of the above 2011 Executive Vice President (Director of the Board) and Managing Director of Corporate Division of the above 2012 President and COO (Representative Director) of the above 2013 Senior Vice President (Director of the Board) of the Company 2016 Vice Chairman of the Board (Representative Director) of Sammy Corporation Standing Audit & Supervisory Board Member of the Company (current position) Audit & Supervisory Board Member of Japan Multimedia Services Corporation (now JMS- United Co. Ltd.) (current position) 2017 Audit & Supervisory Board Member of SEGA SAMMY BUSINESS SUPPORT INC. (current position) 2018 Audit & Supervisory Board Member of Sammy Corporation (current position) 2003 Joined Sammy Corporation as Director of Audit Office 2004 Director of Legal Department of Administration Division of the above 2006 Director of Audit & Supervisory Board Members Office of the Company 2014 Audit & Supervisory Board Member of the Company (current position) Standing Audit & Supervisory Board Member of SEGA CORPORATION (now SEGA Games Co., Ltd.) 2015 Standing Audit & Supervisory Board Member of SEGA Holdings Co., Ltd. (current position) Audit & Supervisory Board Member of SEGA Interactive Co., Ltd. (current position) Audit & Supervisory Board Member of SEGA Games Co., Ltd. (current position) Audit & Supervisory Board Member of TMS ENTERTAINMENT CO., LTD. (current position) Audit & Supervisory Board Member of SEGA ENTERTAINMENT Co., Ltd. (current position) Audit & Supervisory Board Member of MARZA ANIMATION PLANET INC. (current position) 1990 Director of Cosmo Securities Co., Ltd. (now IwaiCosmo Securities Co., Ltd.) 1996 Managing Director of the above 1999 Managing Director of Cosmo Investment Management Co., Ltd. (now Meiji Yasuda Asset Management Company Ltd.) 2005 Standing Audit & Supervisory Board Member of Sammy Networks, Co., Ltd Substitute Audit & Supervisory Board Member (External) of the Company 2009 Standing Audit & Supervisory Board Member (External) of the Company Audit & Supervisory Board Member of Sammy Networks Co., Ltd. Audit & Supervisory Board Member of SEGA TOYS CO., LTD Audit & Supervisory Board Member of SEGA Networks Co., Ltd. (now SEGA Games Co., Ltd.) 2015 Audit & Supervisory Board Member of SEGA LIVE CREATION Inc. (now CA Sega Joypolis Ltd.) Audit & Supervisory Board Member of SEGA SAMMY BUSINESS SUPPORT INC Audit & Supervisory Board Member (External) of the Company (current position) 1978 Registered with the Japan Federation of Bar Associations 2000 Established Enomoto Law Office 2004 Audit & Supervisory Board Member (External) of Sammy Networks Co., Ltd. Audit & Supervisory Board Member (External) of SEGA CORPORATION (now SEGA Games Co., Ltd.) 2005 Substitute Audit & Supervisory Board Member (External) of the Company 2006 Outside Audit & Supervisory Board Member of Nippon Koei Co., Ltd Audit & Supervisory Board Member (External) of the Company (current position) 2014 Outside Audit & Supervisory Board Member of SHIMOJIMA Co., Ltd. (current position) 2015 External Audit & Supervisory Board Member of SEGA Holdings Co., Ltd. (current position) Audit & Supervisory Board Member of SEGA Games Co., Ltd. Audit & Supervisory Board Member of SEGA Interactive Co., Ltd. * Qualified outside company auditor as provided in Paragraph 2, Clause 16 of the Companies Act of Japan Executive Officers Yuichi Amari Vice President, Senior Executive Officer Makoto Takahashi Vice President, Senior Executive Officer Toru Nakahara Vice President, Senior Executive Officer Yoichi Owaki Vice President, Senior Executive Officer Hiroshi Ishikura Vice President, Executive Officer Koichi Takahashi Vice President, Executive Officer Takaharu Kato Vice President, Executive Officer 88

91 INTEGRATED REPORT 2018 FINANCIALS 89

92 SEGA SAMMY HOLDINGS Management s Discussion and Analysis Consolidated Statements of Income and Comprehensive Income Long-Term Trends The principal factors that have caused net sales to decline are (1) the dramatic change in market conditions faced by the Pachislot and Pachinko Machines Business, which accounts for a large percentage of net sales, due to the continuous strengthening of regulations and (2) a decrease in the sales and structural reform of the existing businesses (including the closure and sales of amusement centers in the amusement center operations area and the narrowing down of packaged games to be developed). Regarding earnings, after recognizing an operating loss in fiscal 2008, earnings trended toward recovery through fiscal 2011, due mainly to improved profitability in the Pachislot and Pachinko Machines Business. Subsequently, business conditions in existing businesses continued to deteriorate, and earnings trended downward once again. However, profitability has been improving, especially in the Entertainment Contents Business, since the implementation of structural reforms in fiscal Long-Term Trends in Net Sales and Operating Income (Loss) Billions of yen SEGA SAMMY Unit Sales / Pachislot and Pachinko Market Size Thousands of units / Billions of yen Principal Negative Factors 1. Net Sales: Declining Earnings within Existing Businesses amid Market Contraction Net sales Operating income (loss) 12 Packaged Games Area Net Sales Billions of yen Principal Positive Factors Net Sales: Packaged Games Area Earnings Growth (FY) Pachislot machine unit sales Pachislot machine market size Pachinko machine unit sales (SEGA SAMMY unit sales) Pachinko machine market size (FY: Unit sales) (Settlement dates from July to June: Market size) SEGA SAMMY Amusement Center Area Net Sales / Amusement Center Operations Market Size Billions of yen Operating Income: Entertainment Contents Business Profitability Improvement Entertainment Contents Business Operating Income Billions of yen (FY) Amusement center operations market size Amusement center operations net sales Source: JAIA, Amusement Industry Survey Operating Income: Pachislot and Pachinko Machines Business Earnings Decline Pachislot and Pachinko Machines Business Operating Income Billions of yen 71.0 (FY) (FY) (FY) 90

93 INTEGRATED REPORT 2018 Comparing Fiscal 2018 and Fiscal 2017 Net sales: billion Operating income: 17.7billion (Fiscal 2018) Billions of yen Operating income margin: 5.5% ROA*: 1.8% % 5.4% Q Through 2Q Fiscal 2017 Through 3Q Full year 1Q Through 2Q Fiscal 2018 Through 3Q Full year Fiscal 2019 (Plan) Net sales Operating income Operating income margin * ROA = Profit attributable to owners of parent Total assets Summary of Consolidated Financial Statements Billions of yen YoY Change Net sales % Pachislot and Pachinko Machines Business % Entertainment Contents Business % Resort Business % Cost of sales % Gross profit % Selling, general and administrative (SG&A) expenses % Operating income (loss) % Pachislot and Pachinko Machines Business % Entertainment Contents Business % Resort Business Other and eliminations Operating income margin 8.0% 5.5% 2.5 pts. Non-operating income % Non-operating expenses % Ordinary income % Extraordinary income Extraordinary loss Income before income taxes % Total income taxes Profit attributable to owners of parent % Cash dividends per share (Yen) Net income per share (Yen) Total net assets per share (Yen) 1, , Net Sales Although performance in the Entertainment Contents Business was generally favorable, revenue declined in the Pachislot and Pachinko Machines Business due to major sales schedule revision caused by revised regulations in the second half. Operating Income (Loss) In the Entertainment Contents Business, although existing businesses remained robust and profitability improved, revenue declined in the Pachislot and Pachinko Machines Business due to sales schedule revision. The operating margin dropped 2.5 percentage points. Change in Segment Operating Income (Loss) Billions of yen 29.5 Fiscal 2017 Pachislot and Pachinko Machines Business 14.4 Non-Operating Expenses Entertainment Contents Business +3.7 Resort Business 0.3 Consolidated: 11.8 billion Other and eliminations Fiscal 2018 The 1.4 billion of equity in losses of affiliates in the previous fiscal year mainly due to PARADISE SEGA SAMMY increased to 4.3 billion, resulting in an increase in non-operating expenses. Note: Certain line items that are classified as other income (expenses) in the Consolidated Statement Income (Loss) and Comprehensive Income (Loss) have been presented as extraordinary income or extraordinary loss. 91

94 SEGA SAMMY HOLDINGS Consolidated Financial Position Long-Term Trends In fiscal 2008, total assets began decreasing as a consequence of valuation loss on securities and sales of securities. In recent years, although it has been selling amusement centers, the Group has seen total assets trend upward. This steady increase in assets is attributable to the Group s initiatives in preparation for participation in the IR Business, an increase in goodwill accompanying acquisitions in the Entertainment Contents Business, and an increase in investment securities accompanying new investment in growth areas. Regarding investments in growth areas, the Group is exercising due diligence to avoid creating a bloated balance sheet. The equity ratio has remained consistently around 60% due to a policy of securing a certain level of internal reserves that enable investment in growth areas, the payment of stable cash dividends and ensuring financial soundness in consideration of future participation in the domestic IR business, even amid the earnings volatility stemming from the consequent presence or absence of hit products, which is the nature of the Group s businesses. Total Assets and Equity Ratio Billions of yen / % % Total assets Equity ratio (FYE) Comparing Fiscal 2018 and Fiscal 2017 Assets (Billions of yen) Liabilities and Net Assets (Billions of yen) Total investments and other assets billion Total intangible assets billion Total property, plant and equipment 3.5 billion Total current assets 46.8 billion Total net assets 1.0 billion Total liabilities 47.1billion Declined due to a decrease in notes and accounts receivable trade and short-term investment securities. While total shareholders equity was down due to cash dividends paid, profit attributable to owners of parent was recorded. Total liabilities decreased due to payment of accounts payable trade and redemption of bonds. The equity ratio rose 6.0 percentage points, to 65.0%. 92

95 INTEGRATED REPORT 2018 Consolidated Cash Flows Long-Term Trends With the exception of certain fiscal periods, the Group has continued to record net cash outflows in investing activities due to M&As in growth areas and strategic investments to raise production capacity. Since fiscal 2011, the Group has been investing in organizational restructuring. These efforts included investments to make three listed subsidiaries into wholly owned subsidiaries. In addition, the Group is investing actively in such growth areas as the IR business and the digital games area. Through a cash management system, the Group uses internal capital efficiently. Also, the Group uses a range of methods to support liquidity and meet its investment needs flexibly, including borrowings and bond issuance. Cash Flows Billions of yen Net cash provided by (used in) operating activities Net cash provided by (used in) investing activities Free cash flows (FY) Fiscal 2018 Cash Flows Cash and cash equivalents at the end of fiscal 2015 amounted to 176,566 million, down 22,642 million from the previous fiscal year-end. Consolidated Cash Flows Billions of yen Net cash provided by operating activities Net cash used in investing activities 20.4 Net cash used in financing activities Breakdown of Cash Flows Cash Flows from Operating Activities Billions of yen Income before income taxes Depreciation and amortization Increase / decrease in notes and accounts receivable trade ( = increase) Decrease in notes and accounts payable trade ( = decrease) 23.7 Cash Flows from Investing Activities Purchase of property, plant and equipment 10.9 Purchase of intangible assets 10.5 Proceeds from sales of property, plant and equipment +9.5 Cash and cash equivalents 2017 (FYE) Cash and cash equivalents 2018 Cash Flows from Financing Activities Redemption of bonds 19.5 Cash dividends paid 9.3 Proceeds from long-term loans payable Net cash provided by operating activities billion Factors including 12,413 million in income before income taxes, 19,180 million of depreciation and amortization, and a 15,179 million decrease in notes and accounts receivable trade, despite a 23,760 million decrease in notes and accounts payable trade, resulted in 26,487 million of net cash provided by operating activities in the fiscal year under review ( 59,126 million inflow in the previous fiscal year). Net cash used in investing activities 20.4 billion Factors including investing of 10,942 million for purchase of property, plant and equipment, 10,529 million for purchase of intangible assets, 6,206 million for purchase of stocks of subsidiaries and affiliates, and 5,192 million for payments of lease deposits, despite 9,564 million proceeds from sales of property, plant and equipment, resulted in 20,422 million of net cash used in investing activities in the fiscal year under review ( 4,767 million outflow in the previous fiscal year). Net cash used in financing activities 28.7billion Expenditures of 6,354 million for repayment of long-term loans payable, 19,500 million for redemption of bonds, and 9,380 million for cash dividends paid, despite 10,000 million proceeds from long-term loans payable, resulted in 28,780 million of net cash used in financing activities in the fiscal year under review ( 38,334 million outflow in the previous fiscal year). 93

96 SEGA SAMMY HOLDINGS Non-Financial Assets Human Capital Consolidated Employee Numbers At the end of fiscal 2018, the consolidated number of employees was 7,726, up 87 from the previous fiscal year-end. The Group is advancing the deployment of personnel to growth areas as a priority measure. Consolidated Employee Numbers People 7,665 7,472 6,856 7,008 6,700 6,236 6,000 7,888 7,606 7,6397,726 Employee Numbers by Segment People ,271 5,135 5,257 5,349 1,658 1,448 1,598 1, (FYE) Intellectual Properties Pachislot and Pachinko Machine Business Resort Business Corporate Entertainment Contents Business (FYE) R&D Expenses and Content Production Expenses For the three-period between fiscal 2016 and fiscal 2018, R&D and content production expenses were equivalent to over 18% of net sales on average. In recent years in particular, we have proactively invested in expanding our lineup in the digital games area over the medium term. In fiscal 2018, expenditures were 62.0 billion, a 7.6% decline compared to the previous fiscal year due to postponed investment in new titles within the digital games area. Reference Recognition of R&D Expenses and Content Production Expenses by Product and Service The Group undertakes stable, long-term investment in R&D and content production with the aim of creating and strengthening IP which are a source of the Group s competitiveness and generating earnings continuously. The method and timing of expense recognition differs based on development lead times and product lifecycles. Pachislot and Pachinko Machines Business and casino machines of the amusement machine sales area Expenses recognized as they arise (process outsourcing expenses recognized when work is inspected) Digital games area Recognize in intangible assets during development period, and basic straight-line amotization period is 24 months from month of service commencement (The amortization period differs depending on the title. Titles with long lifecycles can have amotization periods of more than 36 months.) Packaged games area and amusement machine sales area (excluding casino machines) 1 Primarily content for home video game consoles and amusement machines Recognized as work in process during development, and recognized as expenses linked to units sales after launch. 2 Primarily PC games Recognized as work in process during development, and recognize as expenses after launch but recognition rule of packaged game sales and download sales are different. 94

97 INTEGRATED REPORT 2018 Company Profile / Stock Information Company Profile Company name Address URL SEGA SAMMY HOLDINGS INC. Sumitomo Fudosan Osaki Garden Tower, Nishi-Shinagawa, Shinagawa-ku, Tokyo , Japan Established 2004/10/1 Capital 29,900 million yen (As of March 31, 2018) Principal business Management of SEGA SAMMY Group as the holding company Stock Information (As of March 31, 2018) Number of shares authorized for issue 800,000,000 Total shares issued and outstanding 266,229,476 Number of Shareholders 80,330 Major Shareholders (As of March 31, 2018) Name of shareholder Shares held (thousands) Shares ratio excluding Company s treasury stock (%) HS Company 35, FSC Co., Ltd. 13, Japan Trustee Services Bank,Ltd. (Trust account) 10, Hajime Satomi 7, The Master Trust Bank of Japan, Ltd. (Trust account) 7, ORBIS SICAV 4, JP MORGAN CHASE BANK , Japan Trustee Services Bank,Ltd. (Trust account 5) 3, STATE STREET BANK WEST CLIENT - TREATY , GOLDMAN, SACHS& CO. REG 3, Total 93, Breakdown of Shareholders Other companies 12.06% Financial institutions Securities companies 2.18% 13.93% Foreign institutions and individuals 27.66% As of March 31, 2017 Treasury stock 11.96% Japanese individuals and other 32.21% Securities companies 1.83% Other companies 21.13% Financial institutions 14.96% Foreign institutions and individuals 28.07% Treasury stock 11.96% As of March 31, 2018 Japanese individuals and other 22.05% Notes: 1. Of the abovementioned numbers of shares held, the numbers of shares related to trust businesses are as follows. Japan Trustee Services Bank, Ltd.(Trust account) 10,754,000 shares The Master Trust Bank of Japan, Ltd. (Trust account) 7,084,000 shares Japan Trustee Services Bank, Ltd.(Trust account 5) 3,790,000 shares 2. At the end of the previous fiscal year, Hajime Satomi was a major shareholder. At the end of the fiscal year under review, Hajime Satomi was no longer a major shareholder, and HS Company had become a new major shareholder. Further, Chairman and Group CEO (Representative Director) of SEGA SAMMY HOLDINGS INC. Hajime Satomi and his family hold all shares of HS Company, which is an asset management company. 3. In addition to the abovementioned, SEGA SAMMY HOLDINGS INC. holds 31,850,000 shares of treasury stock. 95

98 SEGA SAMMY HOLDINGS Consolidated Balance Sheets SEGA SAMMY HOLDINGS INC. and Consolidated Subsidiaries As of March 31, 2017 and 2018 Assets Current assets Cash and deposits 137, ,896 Notes and accounts receivable trade (Note 6 (5)) 44,500 29,339 Allowance for doubtful accounts (329) (259) Short-term investment securities 65,203 24,694 Merchandise and finished goods 18,669 8,036 Work in process 14,838 18,347 Raw materials and supplies 13,933 14,190 Income taxes receivable 1,559 4,454 Deferred tax assets 6,929 5,018 Other 21,317 15,630 Total current assets 324, ,350 Noncurrent assets Property, plant and equipment Buildings and structures 101,210 93,528 Accumulated depreciation (65,645) (59,701) Buildings and structures, net 35,564 33,826 Machinery, equipment and vehicles 15,724 13,469 Accumulated depreciation (10,802) (9,855) Machinery, equipment and vehicles, net 4,921 3,613 Amusement machines and facilities 46,783 43,635 Accumulated depreciation (37,204) (34,354) Amusement machines and facilities, net 9,579 9,280 Land (Note 6 (3)) 23,740 23,741 Construction in progress 577 1,603 Other 50,767 48,887 Accumulated depreciation (43,540) (42,807) Other, net 7,226 6,079 Total property, plant and equipment 81,609 78,145 Intangible assets Goodwill 10,807 8,541 Other 11,352 14,942 Total intangible assets 22,160 23,483 Investments and other assets Investment securities (Notes 6 (1) and (2)) 69,845 70,216 Long-term loans receivable 1,757 1,549 Lease and guarantee deposits 11,123 12,180 Net defined benefit assets 828 1,908 Deferred tax assets 535 1,412 Other 10,363 7,707 Allowance for doubtful accounts (739) (449) Total investments and other assets 93,713 94,526 Total noncurrent assets 197, ,155 Total assets 521, ,505 See accompanying notes. 96

99 INTEGRATED REPORT Liabilities Current liabilities Notes and accounts payable-trade (Note 6 (5)) 45,631 21,716 Short-term loans payable 6,354 15,838 Current portion of bonds 19,500 10,000 Income taxes payable 2,950 1,482 Accrued expenses 13,961 13,011 Provision for bonuses 5,907 5,872 Provision for directors bonuses Provision for point card certificates 5 18 Provision for dismantling of fixed assets 815 Asset retirement obligations 303 1,734 Deferred tax liabilities Other 16,524 14,169 Total current liabilities 112,567 84,484 Noncurrent liabilities Bonds payable 32,500 22,500 Long-term loans payable 44,500 38,661 Net defined benefit liability 3,303 3,572 Deferred tax liabilities 2,574 1,852 Deferred tax liabilities for land revaluation Asset retirement obligations 3,735 2,234 Provision for dismantling of fixed assets Other 9,860 8,682 Total noncurrent liabilities 97,534 78,564 Total liabilities 210, ,049 Net assets Shareholders equity Capital stock 29,953 29,953 Capital surplus 117, ,345 Retained earnings 207, ,174 Treasury stock (54,769) (54,781) Total shareholders equity 300, ,691 Accumulated other comprehensive income Valuation difference on available-for-sale securities 11,041 10,528 Deferred gains or losses on hedges (71) 17 Revaluation reserve for land (Note 6 (3)) Foreign currency translation adjustment (4,479) (2,147) Remeasurements of defined benefit plans 588 (479) Total accumulated other comprehensive income 7,419 8,259 Subscription rights to shares Non-controlling interests 3,428 1,685 Total net assets 311, ,456 Total liabilities and net assets 521, ,505 See accompanying notes. 97

100 SEGA SAMMY HOLDINGS Consolidated Statements of Income and Comprehensive Income SEGA SAMMY HOLDINGS INC. and Consolidated Subsidiaries Years ended March 31, 2017 and Net sales 366, ,664 Cost of sales (Notes 7 (1) and (2)) 231, ,930 Gross profit 135, ,734 Selling, general and administrative expenses (Note 7 (2)) 106, ,013 Operating income 29,527 17,720 Other income (expenses) Interest income Dividends income Gain on investments in partnership Foreign exchange gains 294 Gain on valuation of compound financial instruments Interest expenses (940) (712) Equity in losses of affiliates (1,457) (4,368) Commission fee (58) (86) Loss on investments in partnership (243) (77) Foreign exchange losses (49) Loss on retirement of noncurrent assets (685) (619) Settlement package (505) (7) Gain on sales of noncurrent assets (Note 7 (3)) 9, Gain on sales of investment securities 1, Gain on liquidation of subsidiaries and affiliates 290 Gain on reversal of subscription rights to shares 801 Gain on reversal of provision for dismantling of fixed assets Gain on reversal of restructuring loss 124 Loss on sales of noncurrent assets (Note 7 (4)) (81) (220) Impairment loss (Note 7 (6)) (6,034) (2,474) Loss on valuation of investment securities (1,105) (142) Early extra retirement payments (149) (22) Restructuring loss (Note 7 (5)) (419) Other, net 1, Subtotal 4,210 (5,306) Income before income taxes 33,738 12,413 Income taxes current 6,354 2,541 Income taxes deferred (686) 503 Total income taxes 5,667 3,045 Profit 28,070 9,368 (Breakdown) Profit attributable to owners of parent 27,607 8,930 Profit attributable to non-controlling interests Other comprehensive income Valuation difference on available-for-sale securities (456) (500) Deferred gains or losses on hedges 39 (0) Foreign currency translation adjustment (2,561) 189 Remeasurements of defined benefit plans, net of tax (57) (1,039) Share of other comprehensive income of entities accounted for using equity method (1,381) 2,191 Total other comprehensive income (Note 7 (7)) (4,416) 841 Comprehensive income 23,653 10,209 (Breakdown) Comprehensive income attributable to owners of parent 23,457 9,771 Comprehensive income attributable to non-controlling interests See accompanying notes. 98

101 Consolidated Statements of Changes in Net Assets INTEGRATED REPORT 2018 SEGA SAMMY HOLDINGS INC. and Consolidated Subsidiaries Years ended March 31, 2017 and 2018 Prior year (From April 1, 2016 to March 31, 2017) Shareholders equity Capital stock Capital surplus Retained earnings Treasury stock Total shareholders equity Balance as of April 1, , , ,505 (54,758) 288,105 Changes of items during the period Dividends from surplus (9,375) (9,375) Profit attributable to owners of parent 27,607 27,607 Effect of changes in accounting period of consolidated subsidiaries Purchase of treasury stock (11) (11) Disposal of treasury stock (0) 0 0 Change in scope of consolidation Change in scope of equity method (312) (312) Purchase of shares of consolidated subsidiaries (883) (883) Reversal of revaluation reserve for land (4,941) (4,941) Net changes of items other than shareholders equity Total changes of items during the period (883) 13,133 (10) 12,239 Balance as of March 31, , , ,639 (54,769) 300,345 Valuation difference on available-forsale securities Deferred gains or losses on hedges Accumulated other comprehensive income Revaluation reserve for land Foreign currency translation adjustment Remeasurements of defined benefit plans Total accumulated other comprehensive income Balance as of April 1, ,494 (40) (4,600) (876) 651 6,628 Changes of items during the period Dividends from surplus Profit attributable to owners of parent Effect of changes in accounting period of consolidated subsidiaries Purchase of treasury stock Disposal of treasury stock Change in scope of consolidation Change in scope of equity method Purchase of shares of consolidated subsidiaries Reversal of revaluation reserve for land Net changes of items other than shareholders equity (452) (31) 4,941 (3,602) (63) 790 Total changes of items during the period (452) (31) 4,941 (3,602) (63) 790 Balance as of March 31, ,041 (71) 340 (4,479) 588 7,419 Subscription rights to shares Non-controlling interests Total net assets Balance as of April 1, , ,950 Changes of items during the period Dividends from surplus (9,375) Profit attributable to owners of parent 27,607 Effect of changes in accounting period of consolidated subsidiaries Purchase of treasury stock (11) Disposal of treasury stock 0 Change in scope of consolidation 155 Change in scope of equity method (312) Purchase of shares of consolidated subsidiaries (883) Reversal of revaluation reserve for land (4,941) Net changes of items other than shareholders equity (497) (987) (693) Total changes of items during the period (497) (987) 11,546 Balance as of March 31, , ,497 See accompanying notes. 99

102 SEGA SAMMY HOLDINGS Consolidated Statements of Changes in Net Assets Current year (From April 1, 2017 to March 31, 2018) Shareholders equity Capital stock Capital surplus Retained earnings Treasury stock Total shareholders equity Balance as of April 1, , , ,639 (54,769) 300,345 Changes of items during the period Dividends from surplus (9,375) (9,375) Profit attributable to owners of parent 8,930 8,930 Effect of changes in accounting period of consolidated subsidiaries (20) (20) Purchase of treasury stock (13) (13) Disposal of treasury stock (0) 0 0 Change in scope of consolidation Change in scope of equity method Purchase of shares of consolidated subsidiaries (175) (175) Reversal of revaluation reserve for land Net changes of items other than shareholders equity Total changes of items during the period (175) (465) (12) (654) Balance as of March 31, , , ,174 (54,781) 299,691 Valuation difference on available-forsale securities Deferred gains or losses on hedges Accumulated other comprehensive income Revaluation reserve for land Foreign currency translation adjustment Remeasurements of defined benefit plans Total accumulated other comprehensive income Balance as of April 1, ,041 (71) 340 (4,479) 588 7,419 Changes of items during the period Dividends from surplus Profit attributable to owners of parent Effect of changes in accounting period of consolidated subsidiaries Purchase of treasury stock Disposal of treasury stock Change in scope of consolidation Change in scope of equity method Purchase of shares of consolidated subsidiaries Reversal of revaluation reserve for land Net changes of items other than shareholders equity (512) 89 2,331 (1,067) 840 Total changes of items during the period (512) 89 2,331 (1,067) 840 Balance as of March 31, , (2,147) (479) 8,259 Subscription rights to shares Non-controlling interests Total net assets Balance as of April 1, , ,497 Changes of items during the period Dividends from surplus (9,375) Profit attributable to owners of parent 8,930 Effect of changes in accounting period of consolidated subsidiaries (20) Purchase of treasury stock (13) Disposal of treasury stock 0 Change in scope of consolidation Change in scope of equity method Purchase of shares of consolidated subsidiaries (175) Reversal of revaluation reserve for land Net changes of items other than shareholders equity 515 (1,742) (386) Total changes of items during the period 515 (1,742) (1,040) Balance as of March 31, , ,456 See accompanying notes. 100

103 Consolidated Statements of Cash Flows INTEGRATED REPORT 2018 SEGA SAMMY HOLDINGS INC. and Consolidated Subsidiaries Years ended March 31, 2017 and Net cash provided by (used in) operating activities: Income before income taxes 33,738 12,413 Depreciation and amortization 20,561 19,180 Impairment loss 6,034 2,474 Amount of transfer of equipment by amusement center operations business (3,554) (2,757) Loss (gain) on sales of noncurrent assets (9,437) 156 Loss on retirement of noncurrent assets Loss (gain) on liquidation of subsidiaries and affiliates (290) 0 Loss (gain) on sales of investment securities (1,323) (531) Loss (gain) on valuation of investment securities 1, Loss (gain) on investments in partnership (216) (810) Amortization of goodwill 2,456 2,169 Increase (decrease) in allowance for doubtful accounts (107) (57) Increase (decrease) in provision for directors bonuses (4) 9 Increase (decrease) in net defined benefit liability (871) (857) Increase (decrease) in provision for bonuses 1,383 (27) Increase (decrease) in provision for dismantling of fixed assets (1,105) (233) Increase (decrease) in provision for business restructuring (129) Interest and dividends income (1,266) (1,313) Interest expenses Foreign exchange losses (gains) (240) 69 Equity in (earnings) losses of affiliates 1,457 4,368 Decrease (increase) in notes and accounts receivable trade 10,664 15,179 Decrease (increase) in inventories (12,778) 6,953 Increase (decrease) in notes and accounts payable trade 12,496 (23,760) Increase (decrease) in guarantee deposits received (478) 407 Other, net 3,003 (1,841) Subtotal 62,723 32,665 Interest and dividends income received 1,291 1,308 Interest expenses paid (962) (726) Income taxes paid (6,859) (7,901) Income taxes refund 2,933 1,140 Net cash provided by (used in) operating activities 59,126 26,487 See accompanying notes. 101

104 SEGA SAMMY HOLDINGS Consolidated Statements of Cash Flows Net cash provided by (used in) investing activities: Payments into time deposits (992) (36) Proceeds from withdrawal of time deposits 6,437 2,711 Purchase of short-term investment securities (3,000) (3,000) Proceeds from redemption of securities 1,000 3,000 Purchase of trust beneficiary right (1,026) (1,360) Proceeds from sales of trust beneficiary right 1,001 1,058 Purchase of property, plant and equipment (15,295) (10,942) Proceeds from sales of property, plant and equipment 13,406 9,564 Purchase of intangible assets (9,250) (10,529) Proceeds from sales of intangible assets 0 Purchase of investment securities (1,194) (744) Proceeds from sales of investment securities 3,688 2,166 Proceeds from redemption of investment securities 1,990 1,500 Payments for investment in partnerships (1,148) (2,161) Proceeds from distribution of investment in partnerships 717 1,105 Purchase of investments in subsidiaries resulting in change in scope of consolidation (Note 9 (2)) (2,250) Payments for sales of shares of subsidiaries resulting in change in scope of consolidation (11) Proceeds from sales of shares of subsidiaries resulting in change in scope of consolidation (Note 9 (3)) 972 Purchase of stocks of subsidiaries and affiliates (839) (6,206) Payments of loans receivable (1,757) (1,587) Collection of loans receivable Reduction of investments in trusts Payments for lease deposits (988) (5,192) Collection of lease deposits 1, Other, net 1,379 (1,259) Net cash provided by (used in) investing activities (4,767) (20,422) Net cash provided by (used in) financing activities: Net increase (decrease) in short-term loans payable (1) (0) Proceeds from long-term loans payable 2,000 10,000 Repayments of long-term loans payable (14,043) (6,354) Redemption of bonds (14,200) (19,500) Purchase of treasury stock (11) (13) Purchase of treasury stock of subsidiaries (2,201) Cash dividends paid (9,376) (9,380) Payments from changes in ownership interests in subsidiaries that do not result in change in scope of consolidation (984) Other, net (1,718) (1,329) Net cash provided by (used in) financing activities (38,334) (28,780) Effect of exchange rate change on cash and cash equivalents (1,124) 72 Net increase (decrease) in cash and cash equivalents 14,900 (22,642) Cash and cash equivalents at beginning of period 185, ,208 Increase in cash and cash equivalents from newly consolidated subsidiaries 25 Decrease in cash and cash equivalents resulting from exclusion of subsidiaries from consolidation (1,305) Increase (decrease) in cash and cash equivalents resulting from change in accounting period of consolidated subsidiaries (25) Cash and cash equivalents at end of period (Note 9 (1)) 199, ,566 See accompanying notes. 102

105 Notes to Consolidated Financial Statements SEGA SAMMY HOLDINGS INC. and Consolidated Subsidiaries Years ended March 31, 2017 and 2018 INTEGRATED REPORT Basis of Presenting Consolidated Financial Statements The accompanying consolidated financial statements of SEGA SAMMY HOLDINGS INC. (the Company ) and its consolidated subsidiaries have been prepared in accordance with the provisions set forth in the Financial Instruments and Exchange Law of Japan and its related accounting regulations, and in conformity with accounting principles generally accepted in Japan ( Japanese GAAP ), which are different in certain respects as to application and disclosure requirements from International Financial Reporting Standards ( IFRS ). The accounts of the Company s overseas subsidiaries are based on their accounting records maintained in conformity with generally accepted accounting principles prevailing in the respective countries of domicile. However, necessary adjustments are made upon consolidation for 2017 and The accompanying consolidated financial statements have been restructured and translated into English (with certain expanded disclosure) from the consolidated financial statements of the Company prepared in accordance with Japanese GAAP and filed with the appropriate Local Finance Bureau of the Ministry of Finance as required by the Financial Instruments and Exchange Law of Japan. Certain supplementary information included in the statutory Japaneselanguage consolidated financial statements is not presented in the accompanying consolidated financial statements. Each amount of the accompanying consolidated financial statements is rounded down to the nearest one million yen. In preparing the accompanying consolidated financial statements, certain reclassifications have been made in order to present them in a form which is more familiar to readers outside Japan. Certain reclassifications have been made to the 2017 consolidated financial statements to conform to the classifications used in These changes had no impact on previously reported results of operations or shareholders equity. 2 Summary of Significant Accounting Policies 1. Scope of consolidation (1) Number of consolidated subsidiaries: 75 From the fiscal year ended March 31, 2018, the following was included in the Company s consolidated subsidiaries; J-NEXT Career Co., Ltd. (Oceanize Career Co., Ltd changed its name in July 2017), because of additional acquisition of shares. From the fiscal year ended March 31, 2018, the followings have been excluded from the scope of consolidation; J-NEXT Career Co., Ltd., because of merger with J-NEXT Co.,Ltd.; Atlus Holding, Inc., because of merger with Atlus U.S.A., Inc.; idarts Group Limited, because of merger with DARTSLIVE ASIA LIMITED; TMS MUSIC (HK) LIMITED, because of liquidation in October (2) Number of non-consolidated subsidiaries: 16 Non-consolidated subsidiaries are excluded from the scope of consolidation because the combined amount of each of assets, net sales and net income corresponding to the percentage of equity interest held by the Company, and the combined amount of retained earnings corresponding to the percentage of equity interest held by the Company, do not have significant effect on the consolidated financial statements. 2. Application of the equity method (1) Number of non-consolidated subsidiaries accounted for under the equity method: 6 From the fiscal year ended March 31, 2018, the following has been included in the scope of application of equity-method; GO GAME MALAYSIA SDN. BHD., because of acquisition of shares. (2) Number of affiliated companies accounted for under the equity method: 11 (3) Number of non-consolidated subsidiaries and affiliated companies which are not accounted for under the equity method: 11 Some of the Company s non-consolidated subsidiaries and affiliates are not accounted for under the equity method because the combined amount of net income corresponding to the percentage of equity interest held by the Company, and the combined amount of retained earnings corresponding to the percentage of equity interest held by the Company do not have significant effect on the consolidated financial statements even if they are excluded from the scope of equity method, and have no significance as a whole. 3. Accounting policies (1) Valuation and accounting treatment for important assets 1) Held-to-maturity debt securities Held-to-maturity debt securities are stated at amortized cost method (the straight-line method) 2) Available-for-sale securities Securities with fair market value: Securities with fair market value are stated at fair market value. The difference between acquisition cost and market value is accounted for as valuation difference on available-for-sale securities in net assets, with cost of sales determined by the moving-average method. With respect to compound financial instruments whose fair values cannot be categorized and measured for each embedded derivative, the entire compound financial instruments are appraised by fair value, and unrealized gains or losses are reported as income or expenses for the fiscal year ended March 31, Securities without quoted market prices: Securities without quoted market prices are carried at cost, which is determined by the moving-average method. 103

106 SEGA SAMMY HOLDINGS Notes to Consolidated Financial Statements The net amount of equity included in the Company s financial statements from limited liability investment partnerships and similar investments, regarded as marketable securities under Article 2-2 of the Financial Investment and Exchange Law of Japan, is calculated based on the relevant financial statements for the partnership available as of the reporting date stipulated in the partnership agreement. 3) Derivatives Derivatives are stated at fair market value. 4) Inventories Inventories are stated at cost, cost being determined mainly by the gross-average method (or at the net realizable value (NRV) calculated by writing down the book value to reflect a decrease in the NRV). Work in process is also stated at cost, cost being determined by the specific identification method (or at the NRV calculated by writing down the book value to reflect a decrease in the NRV). (2) Depreciation and amortization for important assets 1) Property, plant and equipment (excluding lease assets) Depreciation is calculated primarily using the straight-line method. Range of useful life for the assets is as follows: Buildings and Structures: 2 50 years Machinery, equipment and vehicles: 2 16 years Amusement machines and facilities: 2 5 years 2) Intangible assets (excluding lease assets) Amortization is calculated using the straight-line method. The software used in the Company is amortized by the straight-line method based on the useful lives within the Company (less than 5 years). 3) Lease assets Finance leases which transfer ownership: Depreciation method for such assets is the same as that which applies to property, plant and equipment owned by the Company. Finance leases which do not transfer ownership: Depreciated, using the straight-line method over a useful life equal to the lease period with a residual value of zero. (3) Accounting for deferred assets Bond issue cost: All expenses are expensed when incurred. (4) Accounting for allowances and provisions 1) Allowance for doubtful accounts Allowance for doubtful accounts is provided in the amount sufficient to cover possible losses based on a historical write-off of general receivables. Receivables with default possibility and bankrupt receivables are calculated based on an individual assessment of the possibility of collection. 2) Provision for bonuses The estimated amount of bonuses was recorded to meet the payment of employee bonuses, an amount corresponding to the current fiscal year. 3) Provision for directors bonuses The estimated amount of bonuses was recorded to meet the payment of Directors and Audit & Supervisory Board Members bonuses, an amount corresponding to the current fiscal year. 4) Provision for point card certificates In order to provide for the usage of points granted to customers under the point system, the estimated future usage amount for the end of the fiscal year ended March 31, 2018 has been recorded. 5) Provision for dismantling of fixed assets To provide for expenses for dismantling unused decrepit buildings, estimated future expenses are recorded. (5) Accounting method for retirement benefits 1) Attribution method for projected retirement benefits: In calculating retirement benefits obligations, benefit-formula attribution is adopted for the purpose of attributing projected retirement benefits to the period up to the end of the fiscal year ended March 31, ) Treatment of actuarial gains and losses and prior service costs: Prior service costs are amortized equally over a certain number of years (10 years in principle) within the average remaining years of service for the employees at the time of accrual, or are charged to income collectively at the time of accrual. Actuarial gains and losses are amortized by the straight-line method over a certain number of years (10 years in principle) within average remaining years of service for the employees at the time of accrual in each fiscal year, commencing from the following fiscal year after the accrual for each employee, or are charged to income collectively in the following fiscal year after the accrual. (6) Accounting for significant hedge 1) Hedge accounting The Group adopts deferred hedge accounting. However, special treatment is used for qualifying interest rate swap transactions. Moreover, allocation hedge accounting is applied to qualifying currency swap transactions and forward exchange contracts. 2) Hedging instruments and hedged items Hedging instrument: Currency swaps, interest rate swaps, and forward exchange contracts Hedged item: Interest on loans payable, receivables and payables denominated in foreign currencies 3) Hedge policy Derivative instruments are used to mitigate risks associated with foreign exchange and interest rate fluctuations. As a rule, hedging is only used for items in which actual demand exists, and not for speculative purposes. 4) Evaluation of hedge effectiveness Hedge effectiveness is evaluated through comparative analysis of the cumulative fluctuations in the market between the hedged item and the hedging instrument. Evaluation of hedge effectiveness at fiscal year-end is omitted for currency swap transactions, as material conditions for the notional principal of hedging instruments and those for hedged items are the same and these transactions are deemed to offset the market fluctuations. Evaluation of hedge effectiveness at fiscal year-end is omitted also for interest rate swap transactions applied to special treatment. (7) Amortization method and period of goodwill If the duration of the effect of goodwill can be rationally estimated, amortization is made over the estimated number of years by the straightline method. In other cases, amortization is made over a five-year-period by the straight-line method. (8) Cash and cash equivalents in the consolidated statements of cash flows In preparing the consolidated statements of cash flows, cash on hand, readily available deposits and short-term highly liquid investments with maturities not exceeding three months at the time of purchase are considered to be cash and cash equivalents. 104

107 INTEGRATED REPORT 2018 (9) Accounting method for consumption taxes Consumption taxes and local consumption taxes are accounted using the net-of-tax method, and non-deductible consumption taxes and local consumption taxes on assets are posted mainly as expenses when incurred. (10) Application of the Consolidated Taxation System The Company and certain domestic consolidated subsidiaries applied the Consolidated Taxation System. 3 Unapplied New Accounting Standards - Accounting Standard for Revenue Recognition (ASBJ Statement No. 29, issued by the Accounting Standards Board of Japan on March 30, 2018) - Implementation Guidance on Accounting Standard for Revenue Recognition (ASBJ Guidance No. 30, issued by the Accounting Standards Board of Japan on March 30, 2018) (1) Overview The International Accounting Standards Board (IASB) and US Financial Accounting Standards Board (FASB) jointly developed comprehensive revenue recognition standards and issued Revenue from Contracts with Customers in May 2014 (IASB s IFRS 15 and FASB s Topic 606). Considering that IFRS 15 shall apply to fiscal years beginning on or after January 1, 2018, and Topic 606 shall apply to fiscal years beginning after December 15, 2017, the ASBJ developed a comprehensive accounting standard on revenue recognition and thus issued the accounting standard together with the implementation guidance. The ASBJ established the accounting standard on revenue recognition by following the basic policies in developing it. The basic policies were: firstly, incorporating the core principle of IFRS 15 as the starting point from the perspective of facilitating comparability among financial statements, which is one of the benefits of ensuring consistency with IFRS 15; secondly, adding alternative treatments, but to the extent not impairing comparability, where consideration should be given to the practice having been used in Japan. (2) Scheduled date of application These ASBJ statement and guidance will be applied from the beginning of the fiscal year ending March 31, (3) Effects of application of the accounting standards The effects of the application are under assessment at the time of preparing these consolidated financial statements. 4 Changes in Presentation (Consolidated statements of income and comprehensive income) Gain on bad debts recovered ( 0 million in the previous fiscal year), Sales discounts ( (9) million in the previous fiscal year), Penalty payment for cancellation of game center lease agreement ( (48) million in the previous fiscal year) and Loss on valuation of shares of subsidiaries and affiliates ( (56) million in the previous fiscal year) which were presented separately under Other income (expenses) in the previous fiscal year, are included in Other, net for the fiscal year, because the amount became immaterial. To reflect the changes to presentation, the consolidated financial statements of the previous fiscal year have been reclassified. (Consolidated statements of cash flows) Loss (gain) on sales of shares of subsidiaries and affiliates ( 67 million in the previous fiscal year) which was presented separately under Net cash provided by (used in) operating activities in the previous fiscal year, is included in Other, net under Net cash provided by (used in) operating activities for the fiscal year, because the amount became immaterial. To reflect the changes to presentation, the consolidated financial statements of the previous fiscal year have been reclassified. 105

108 SEGA SAMMY HOLDINGS Notes to Consolidated Financial Statements 5 Additional Information (Impact of the change of the useful lives of the noncurrent assets) At a meeting of the Board of Directors held on March 31, 2017, the Company resolved to relocate the headquarters of the Company and some of the companies of the SEGA SAMMY Group located in the Tokyo metropolitan area. As a result, at the end of the previous fiscal year, the Company and certain subsidiaries had shortened the useful lives of the noncurrent assets that will become unable to use as a result of the relocation, and the effects of this change are accounted for prospectively. Comparing results with the previous method, operating income and income before income taxes were decreased by 1,816 million, respectively, for the fiscal year ended March 31, The impacts on segment information is described in the related section. (Dissolution of employees pension fund and transition of retirement benefit plan) Regarding The Pension Fund of Japan Electronics Information Technology Industry which the Company and some consolidated subsidiaries are members of, a representatives meeting held on December 5, 2017 resolved to dissolve the said Fund, and the Minister of Health, Labour and Welfare approved of the dissolution on March 31, Regarding the regulatory revision of the defined benefit pension plan that will be the succeeding plan for the Company and one of the consolidated subsidiaries after the dissolution of the said Fund, an agreement has been reached between the management and the employees on January 23, In line with this dissolution and the transition to a new plan, the Accounting Treatment for Transfer between Plans concerning Multiple Employer Plans (Q&A 9) in Practical Solution on Accounting for Transfer between Retirement Benefit Plans (PITF No. 2) were adopted, and the Group recorded 156 million as loss due to transfer of retirement benefit plan under Other income (expenses) for the fiscal year ended March 31, Notes to Consolidated Balance Sheets (1) Assets pledged Shares of subsidiaries and affiliates 21,274 25,973 Total 21,274 25,973 Note: For loans from financial institutions to the equity-method affiliate PARADISE SEGASAMMY Co., Ltd. as of March 31, 2018 and 2017, 73,920 million (KRW700,000 million) and 62,258 million (KRW642,500 million), respectively, the shares of this company were provided as a pledge. (2) Investment securities to non-consolidated subsidiaries and affiliated companies Investment securities (shares) 24,087 27,946 Investment securities (capital contributions) 1,238 1,601 (3) Revaluation reserve for land Consolidated subsidiary SEGA Holdings Co., Ltd. has revalued land for commercial use, pursuant to Japan s Law Concerning Revaluation of Land (Law No. 34, March 31, 1998) and Amendments to the Law Concerning Revaluation of Land (Law No. 19, March 31, 2001). Accordingly, SEGA Holdings Co., Ltd. has recorded an item for the revaluation reserve for land under net assets. Revaluation method SEGA Holdings Co., Ltd. computed the value of land based on the methodology regarding rational adjustments to valuation of fixed assets stipulated in Article 2-3, and appraisals by licensed real estate appraisers prescribed in Article 2-5 of the Enforcement Ordinance No. 119 (March 31, 1998) pertaining to the Law Concerning Revaluation of Land. Date of revaluation: March 31,

109 INTEGRATED REPORT 2018 (4) Overdraft agreements and commitment line agreements The Company and its consolidated subsidiaries have overdraft agreements and commitment line agreements with 15 banks for the effective procurement of working capital. The balance of unexecuted loans, etc., based on these agreements as of March 31, 2018 and 2017 are as follows: Total amount of overdraft limit and commitment line agreements 123, ,400 Balance of executed loans Unexecuted balance 123, ,400 (5) Accounting treatment of notes expiring on the end of fiscal year Notes matured at the end of the current fiscal year were settled as of the note exchange date. Because the end of the current fiscal year was a holiday, the following notes that matured on March 31, 2018 were included in the balance as of March 31, 2018: Notes receivable-trade 749 Notes payable-trade Notes to Consolidated Statements of Income and Comprehensive Income (1) The book value devaluation of inventories held for normal sales purpose based on decline in profitability Cost of sales 7,228 5,860 (2) Research and development expenses included in selling, general and administrative expenses and manufacturing cost ,612 43,525 (3) Gain on sales of noncurrent assets Buildings and structures Machinery, equipment and vehicles 2 0 Land 8, Other property, plant and equipment 3 4 Other intangible assets 0 Total 9, (4) Loss on sales of noncurrent assets Buildings and structures 69 Machinery, equipment and vehicles 0 Amusement machines and facilities 220 Other property, plant and equipment 11 Total

110 SEGA SAMMY HOLDINGS Notes to Consolidated Financial Statements (5) Restructuring loss Previous fiscal year (From April 1, 2016 to March 31, 2017) Restructuring loss mainly resulted from business restructuring in South Korea. Current fiscal year (From April 1, 2017 to March 31, 2018) Not applicable. (6) Impairment loss Previous fiscal year (From April 1, 2016 to March 31, 2017) Use Location Type Amount Amusement facilities China and 5 other locations Buildings and structures 261 Amusement machines and facilities 886 Other property, plant and equipment 346 Other intangible assets 117 Assets for business Toshima-ward, Tokyo Buildings and structures 93 and 8 other locations Amusement machines and facilities 116 Other property, plant and equipment 207 Other intangible assets 91 A complex consisting of a hotel, South Korea Other property, plant and equipment 914 entertainment facilities, and Other intangible assets 0 commercial facilities Land 2,568 Other Minato-ward, Tokyo and 2 other locations Goodwill 430 Total 6,034 For each business segment, the Company classifies assets or asset groups based on whether their cash flows can be estimated independently. The book values of assets or asset groups whose market values declined significantly or that are projected to consistently generate negative cash flows are reduced to their recoverable value. The amount of this reduction is deemed an impairment loss and is recorded under Other expenses in the consolidated financial statements. Recoverable values for amusement facilities and assets for business and goodwill are calculated as memorandum amounts mainly because future cash flows are not expected. The values of complex facilities that consist of a hotel, entertainment and commercial facilities are measured at the net selling value based on the agreement on termination of sale and purchase agreement of municipal properties. Current fiscal year (From April 1, 2017 to March 31, 2018) Use Location Type Amount Amusement facilities Nagoya -shi, Aichi and Buildings and structures other locations Other property, plant and equipment, etc. 19 Assets for business Shinagawa -ward, Tokyo and Buildings and structures other locations Machinery, equipment and vehicles 155 Amusement machines and facilities 98 Other property, plant and equipment 556 Other intangible assets 335 Construction in progress 69 Unutilized assets Nanyo -shi, Yamagata Land 11 Other The United States of America and 1 other location Goodwill 620 Total 2,474 For each business segment, the Company classifies assets or asset groups based on whether their cash flows can be estimated independently. The book values of assets or asset groups whose market values declined significantly or that are projected to consistently generate negative cash flows are reduced to their recoverable value. The amount of this reduction is deemed an impairment loss and is recorded under Other expenses in the consolidated financial statements. Recoverable values for amusement facilities and unutilized assets are calculated as memorandum amounts mainly because future cash flows are not expected. Recoverable values of assets for business and goodwill are primarily measured based on values in use with a principal discount rate of 8.9%. However, assets groups which are expected to generate no future cash flow are calculated as memorandum amounts. 108

111 INTEGRATED REPORT 2018 (7) Reclassification adjustments and the related tax effects concerning other comprehensive income Valuation difference on available-for-sale securities: The amount arising during the period 62 (624) Reclassification adjustments (1,062) (183) Before adjustments to tax effects (999) (807) The amount of tax effects Valuation difference on available-for-sale securities (456) (500) Deferred gains or losses on hedges: The amount arising during the period (8) 2 Reclassification adjustments 47 (3) Before adjustments to tax effects 39 (0) The amount of tax effects Deferred gains or losses on hedges 39 (0) Foreign currency translation adjustment: The amount arising during the period (2,193) 491 Reclassification adjustments (367) Before adjustments to tax effects (2,561) 491 The amount of tax effects (301) Foreign currency translation adjustment (2,561) 189 Remeasurements of defined benefit plans, net of tax: The amount arising during the period (322) (797) Reclassification adjustments 185 (379) Before adjustments to tax effects (137) (1,176) The amount of tax effects Remeasurements of defined benefit plans, net of tax (57) (1,039) Share of other comprehensive income of entities accounted for using equity method: The amount arising during the period (1,381) 2,191 Reclassification adjustments Share of other comprehensive income of entities accounted for using equity method: (1,381) 2,191 Total other comprehensive income (4,416) Notes to Consolidated Statements of Changes in Net Assets Previous fiscal year (From April 1, 2016 to March 31, 2017) 1. Number of outstanding common stock Shares Type of stock As of April 1, 2016 Increase Decrease As of March 31, 2017 Common stock 266,229, ,229, Number of outstanding treasury stock Shares Type of stock As of April 1, 2016 Increase Decrease As of March 31, 2017 Common stock 31,834,807 7, ,841,869 (Summary of the change) Increase Increase due to purchase of odd-lot stock 7,340 shares Decrease Decrease due to sales of odd-lot stock 278 shares 109

112 SEGA SAMMY HOLDINGS Notes to Consolidated Financial Statements 3. Subscription rights to shares Company name Breakdown Type of stock Number of stocks (Shares) As of April 1, 2016 Increase Decrease As of March 31, 2017 Balance at March 31, 2017 () The Company Subscription rights to shares as stock options 303 Total Dividends (1) Dividends Resolution Type of stock Total dividends () Dividends per share (Yen) Record date Effective date Board of Directors meeting held on May 13, 2016 Common stock 4, March 31, 2016 May 27, 2016 Board of Directors meeting held on November 2, 2016 Common stock 4, September 30, 2016 December 1, 2016 (2) Of the dividends of which the record date is in the fiscal year ended March 31, 2017, but the effective date is in the following fiscal year Resolution Type of stock Resource of dividends Total dividends () Dividends per share (Yen) Record date Effective date Board of Directors meeting held on May 12, 2017 Common stock Retained earnings 4, March 31, 2017 June 2, 2017 Current fiscal year (From April 1, 2017 to March 31, 2018) 1. Number of outstanding common stock Shares Type of stock As of April 1, 2017 Increase Decrease As of March 31, 2018 Common stock 266,229, ,229, Number of outstanding treasury stock Shares Type of stock As of April 1, 2017 Increase Decrease As of March 31, 2018 Common stock 31,841,869 9, ,850,504 (Summary of the change) Increase Increase due to purchase of odd-lot stock 9,029 shares Decrease Decrease due to sales of odd-lot stock 394 shares 3. Subscription rights to shares Company name Breakdown Type of stock Number of stocks (Shares) As of April 1, 2017 Increase Decrease As of March 31, 2018 Balance at March 31, 2018 () The Company Subscription rights to shares as stock options 819 Total Dividends (1) Dividends Resolution Type of stock Total dividends () Dividends per share (Yen) Record date Effective date Board of Directors meeting held on May 12, 2017 Common stock 4, March 31, 2017 June 2, 2017 Board of Directors meeting held on November 2, 2017 Common stock 4, September 30, 2017 December 1, 2017 (2) Of the dividends of which the record date is in the fiscal year ended March 31, 2018, but the effective date is in the following fiscal year Resolution Type of stock Resource of dividends Total dividends () Dividends per share (Yen) Record date Effective date Board of Directors meeting held on May 11, 2018 Common stock Retained earnings 4, March 31, 2018 June 1,

113 INTEGRATED REPORT Notes to Consolidated Statements of Cash Flows (1) Cash and cash equivalents at March 31, 2018 and 2017 consisted of the following: Cash and deposits 137, ,896 Short-term investment securities 65,203 24,694 Total 202, ,591 Time deposits with maturities of more than three months (288) (334) Short-term investment securities with period from the acquisition date to the redemption date exceeding three months (3,200) (5,690) Cash and cash equivalents 199, ,566 (2) Assets and liabilities of the company which has become a consolidated subsidiary due to acquisition of shares Previous fiscal year (From April 1, 2016 to March 31, 2017) Amplitude Studios SAS Current assets 880 Noncurrent assets 544 Goodwill 1,329 Current liabilities (123) Noncurrent liabilities (168) Acquisition cost of shares 2,462 Cash and cash equivalents (450) Payments for acquisition of shares, net (2,011) Current fiscal year (From April 1, 2017 to March 31, 2018) Not applicable. (3) Assets and liabilities of the company which has been excluded from consolidated subsidiaries due to sales of shares Previous fiscal year (From April 1, 2016 to March 31, 2017) Disclosure is omitted due to insignificancy. Current fiscal year (From April 1, 2017 to March 31, 2018) Not applicable. 111

114 SEGA SAMMY HOLDINGS Notes to Consolidated Financial Statements 10 Information for Certain Leases (1) A summary of assumed amounts of acquisition cost, accumulated depreciation, accumulated impairment loss and net book value for the years ended March 31, 2018 and 2017, with respect to the finance leases accounted for in the same manner as operating leases, is as follows: Previous fiscal year (From April 1, 2016 to March 31, 2017) Acquisition cost Accumulated depreciation Accumulated impairment loss Net book value Buildings 2, ,135 Total 2, ,135 Current fiscal year (From April 1, 2017 to March 31, 2018) Acquisition cost Accumulated depreciation Accumulated impairment loss Net book value Buildings 2, ,135 Total 2, ,135 (2) Future lease payments and accumulated impairment loss on leased assets Future lease payments as of March 31, 2018 and Due within one year Due after one year Total 1, Accumulated impairment loss on leased assets as of March 31, 2018 and Accumulated impairment loss on leased assets (3) A summary of assumed amounts of lease payments, reversal of allowance for impairment loss on leased assets, depreciation, interest expenses and impairment loss for the years ended March 31, 2018 and 2017, with respect to the finance leases accounted for in the same manner as operating leases, is as follows: Lease payments Reversal of allowance for impairment loss on leased assets Depreciation Interest expenses

115 INTEGRATED REPORT Finance lease transactions (1) Details of lease assets Lease assets mainly consist of the following: Machinery, equipment and vehicles, Other property, plant and equipment and Other intangible assets for office-related facilities. (2) The methods of depreciation for lease assets The methods of depreciation for lease assets are as follows: Lease assets involving finance lease transactions under which the ownership of the lease assets is transferred to lessees are the same methods that are applied to property, plant and equipment owned by the Company. Lease assets involving finance lease transactions under which the ownership of the lease assets is not transferred to lessees are the straight-line method, with their residual values being zero over their leased periods used as the number of years for useful life. 2. Operating lease transactions Future lease payments for operating lease transactions which cannot be canceled as of March 31, 2018 and 2017 are as follows: Due within one year 1,108 1,665 Due after one year ,707 Total 1,980 19, Financial Instruments 1. Outline of financial instruments (1) Policy for financial instruments The Group signed an agreement concerning commitment lines with financial institutions, such as securing medium to long-term fund liquidity with the Company as a holding company, as a safety net for the entire Group. In addition, capital for each business is financed based on the financial plan as needed, through bank borrowings or bond issues applying the Cash Management System for the purpose of efficient utilization of the Group s funds. Most funds are invested primarily in low-risk and high-liquidity financial assets, while some are invested in compound financial instruments such as bonds, etc., for the purpose of efficiently managing funds. Derivatives are used, not for speculative purposes, but to manage exposure to financial risks as described later. (2) Nature and extent of risks arising from financial instruments Receivables such as notes and accounts receivable-trade are exposed to customer credit risks. In addition, foreign currency-denominated trade receivables are exposed to foreign currency exchange fluctuation risks. However, certain parts of the risks are hedged by forward exchange contracts. Short-term investment securities and investment securities are mainly negotiable certificates of deposit and the stocks acquired for business collaborations with business partners, and the latter are exposed to the risk of market price fluctuations. Some compound financial instruments, etc., are also exposed to the risk of market price fluctuations in the stock markets, etc. Of the payables such as notes and accounts payable-trade, trade payables denominated in foreign currencies are exposed to foreign currency exchange fluctuation risks. However, certain parts of the risks are hedged by forward exchange contracts. Loans and bonds payable are for the purpose of procurement of funds necessary for operating funds and capital investment, and parts of them have floating interest rates. For this reason, they are exposed to interest rate fluctuation risks. Derivative transactions consist of forward exchange contracts and currency swap transactions as hedges against currency fluctuation risks on their foreign currency-denominated operating receivables and debt as well as foreign currency-denominated loans payable, and interest rate swap transactions as hedges against interest rate risks on loans payable. For details on hedging instruments, hedged items, hedging policy and the method for evaluating hedging effectiveness concerning hedge accounting, please refer to (6) Accounting for significant hedge in Note 2 - Summary of Significant Accounting Policies, 3. Accounting Policies. (3) Risk management for financial instruments 1) Credit risk management (customers default risk) With respect to trade receivables, departments in charge regularly monitor the situations of major customers in compliance with each company s management regulations for receivables, to control payment terms and balances of customers, in order to detect collection concerns such as worsening of financial conditions early and to lessen the possibilities for collection problems. The credit risk for negotiable certificates of deposit and major bonds, etc., is minimal because the investments of these financial assets are limited to high credit rating issuers. Customers of derivative transactions are in principle limited to correspondent financial institutions. The amount of maximum risk as of the consolidated settlement date is expressed by the amounts of financial assets exposed to credit risks in the balance sheet. 2) Market risk management (foreign currency exchange and interest rate fluctuation risks) Forward exchange contracts are used to hedge foreign currency exchange fluctuation risks identified by currency and by month, in parts of trade receivables and payables and loan receivables denominated in foreign currencies, and trade receivables and payables which are expected to certainly occur due to exports and imports (forecasted transactions). 113

116 SEGA SAMMY HOLDINGS Notes to Consolidated Financial Statements In addition, interest rate swap transactions, etc., are used to hedge fluctuation risks of interests on variable interest loans and currency swap transactions are used to hedge currency fluctuation risks on foreign currency-denominated loans payables, etc. With respect to short-term investment securities and investment securities, their fair values and financial positions of the related issuers (the counterparties) are regularly checked for reports at each company s Board of Directors meeting, etc. Major holdings of shares are continuously reviewed in consideration of relationships with the counterparties. In addition, some compound financial instruments are also continuously reviewed by regularly checking their fair values. With regard to derivative transactions, the financial department or the accounting department executes and manages transactions upon obtaining internal approvals in compliance with the derivative transactions management rules of each Group company. In addition, reports on the situations of derivative transactions are made to each company s Board of Directors meeting when and where appropriate. 3) Liquidity risk management on fund-raising (risk for delinquency) Trade payables and loans are exposed to liquidity risk. In the Group, liquidity risk is managed by setting an appropriate fund balance for each company, and by each company updating fund plans monthly to maintain the balance that exceeds the set fund balance, and by the Company confirming each company s cash position. (4) Supplementary explanations concerning fair values of financial instruments Fair values of financial instruments comprise values determined based on market prices and values determined reasonably when there is no market price. Since variable factors are incorporated in calculating the relevant fair values, such fair values may vary depending on the different assumptions. The notional amounts and other information described in Note 13 - Derivative Transactions do not indicate the amounts of market risk exposed to derivative transactions. 2. Matters concerning the fair value of financial instruments The consolidated balance sheet amount and fair value of financial instruments as well as the differences between these values are described below. Financial instruments whose fair values are not readily determinable are not included in the table. (See Note 2 below.) Previous fiscal year (From April 1, 2016 to March 31, 2017) Consolidated balance sheet amount Fair value Valuation gains (losses) (1) Cash and deposits 137, ,494 (2) Notes and accounts receivable trade 44,500 44,499 (0) (3) Short-term investment securities and investment securities: 1) Held-to-maturity debt securities 2,319 2, ) Available-for-sale securities (*1) 98,744 98,744 3) Equity securities issued by affiliated companies 895 1, Total assets 283, , (1) Notes and accounts payable trade 45,631 45,631 (2) Short-term loans payable 6,354 6,354 (3) Long-term loans payable 44,500 44,903 (403) (4) Current portion of corporate bonds 19,500 19,500 (5) Corporate bonds payable 32,500 32,543 (43) Total liabilities 148, ,933 (446) Derivative transactions (*2) 1) Derivative transactions to which hedge accounting is not applied (4) (4) 2) Derivative transactions to which hedge accounting is applied (71) (71) Total derivative transactions (76) (76) *1 Since the fair values of embedded derivatives cannot be reasonably categorized and measured, those of the entire compound financial instruments are evaluated, and included in investment securities. *2 Receivables and payables incurred by derivative transactions are presented in net amount. 114

117 INTEGRATED REPORT 2018 Current fiscal year (From April 1, 2017 to March 31, 2018) Consolidated balance sheet amount Fair value Valuation gains (losses) (1) Cash and deposits 157, ,896 (2) Notes and accounts receivable trade 29,339 29,339 (0) (3) Short-term investment securities and investment securities: 1) Held-to-maturity debt securities 2,114 2, ) Available-for-sale securities (*1) 51,987 51,987 3) Equity securities issued by affiliated companies 839 1, Total assets 242, , (1) Notes and accounts payable trade 21,716 21,716 (2) Short-term loans payable 15,838 15,838 (3) Long-term loans payable 38,661 38,885 (224) (4) Current portion of corporate bonds 10,000 10,000 (5) Corporate bonds payable 22,500 22,591 (91) Total liabilities 108, ,032 (315) Derivative transactions (*2) 1) Derivative transactions to which hedge accounting is not applied 2) Derivative transactions to which hedge accounting is applied Total derivative transactions *1 Since the fair values of embedded derivatives cannot be reasonably categorized and measured, those of the entire compound financial instruments are evaluated, and included in investment securities. *2 Receivables and payables incurred by derivative transactions are presented in net amount. Note 1: Calculation method of fair values of financial instruments and securities and derivative transactions Assets (1) Cash and deposits and (2) Notes and accounts receivable-trade Of these, items that are settled in the short term (within a year) are recorded using book values, as their fair values approximate book values. In addition, of notes and accounts receivable-trade, those which have more than a year to the payment date from the end of the current fiscal year are stated at the present values by discounting the amount of claim for each receivable with the interest rate calculated by the payment period and credit risk. (3) Short-term investment securities and investment securities The fair values of stocks are determined using the quoted price on the stock exchange, and those of bonds are determined using the quoted price on the exchange or the quoted price obtained from financial institutions. In addition, negotiable certificates of deposit included in available-for-sale securities are recorded using book values, as they are settled in the short term (within a year) and their fair values approximate book values. For notes concerning securities by holding purpose, please see Note 12 - Investment Securities. Note 2: Financial instruments whose fair values are not readily determinable Item Investments in unlisted stocks, etc. 2,228 2,599 Investments in investment limited partnerships, etc. 6,430 8,661 Stocks of non-consolidated subsidiaries Stocks of affiliates 22,893 26,767 Investments in capital of subsidiaries and affiliates 1,238 1,601 These items are not included in (3) Short-term investment securities and investment securities, because there is no market price, future cash flows cannot be estimated, and it is extremely difficult to identify fair values. Liabilities (1) Notes and accounts payable-trade, (2) Short-term loans payable and (4) Current portion of corporate bonds Of these, items that are settled in the short term (within a year) are recorded using book values, as their fair values approximate book values. Of the short-term loans payable, fair values of the loans hedged by interest rate swap contracts meeting certain conditions are calculated by combining them with the relevant interest rate swap. (3) Long-term loans payable and (5) Corporate bonds payable These are stated with the present values calculated by discounting the aggregated values of the principal and interest using an assumed interest rate if loans are newly made. Of the long-term loans payable, fair values of the loans hedged by interest rate swap contracts with special treatment applied and by interest rate and currency swap contracts with combined treatment applied (subject to special treatment and allocation hedge accounting) are calculated by combining them with the relevant interest rate swap or interest rate and currency swap. Derivative transactions For notes concerning derivatives, please see Note 13 - Derivative Transactions. 115

118 SEGA SAMMY HOLDINGS Notes to Consolidated Financial Statements Note 3: Redemption schedule of monetary assets and securities with contractual maturities Previous fiscal year (From April 1, 2016 to March 31, 2017) Within one year One to five years Five to ten years Over ten years Cash and deposits 137,494 Notes and accounts receivable trade 44, Short-term investment securities and investment securities: Held-to-maturity debt securities (Corporate bonds) 200 1, Available-for-sale securities with maturities (Negotiable certificates of deposit) 42,000 Available-for-sale securities with maturities (Other)* 23,000 4,650 Total 247,164 6, * With respect to bonds with an early redemption clause, their expected redemption amounts at maturity without applying the early redemption clause are listed. Current fiscal year (From April 1, 2017 to March 31, 2018) Within one year One to five years Five to ten years Over ten years Cash and deposits 157,896 Notes and accounts receivable trade 29, Short-term investment securities and investment securities: Held-to-maturity debt securities (Corporate bonds) Available-for-sale securities with maturities (Negotiable certificates of deposit) 5,000 Available-for-sale securities with maturities (Other)* 19, Total 212,325 1, * With respect to bonds with an early redemption clause, their expected redemption amounts at maturity without applying the early redemption clause are listed. Note 4: Redemption schedules of loans payable, corporate bonds payable, lease obligations and other interest-bearing liabilities Previous fiscal year (As of March 31, 2017) Category Within one year One to two years Two to three years Three to four years Four to five years Over five years Short-term loans payable 6,354 Long-term loans payable 15,838 13,341 13,320 2,000 Corporate bonds payable 19,500 10,000 12,500 10,000 Lease obligations O ther interest-bearing debt: Accounts payable facilities Current fiscal year (As of March 31, 2018) Category Within one year One to two years Two to three years Three to four years Four to five years Over five years Short-term loans payable 15,838 Long-term loans payable 13,341 13,320 10,000 2,000 Corporate bonds payable 10,000 12,500 10,000 Lease obligations O ther interest-bearing debt: Accounts payable facilities

119 INTEGRATED REPORT Investment Securities 1. Held-to-maturity debt securities Previous fiscal year (As of March 31, 2017) (1) Securities whose market value exceeds the consolidated balance sheet amount Category Consolidated balance sheet amount Fair value Valuation gains (losses) 1) Government / municipal bonds 2) Corporate bonds 1,619 1, ) Other Total 1,619 1, (2) Securities whose market value is equal to or lower than the consolidated balance sheet amount Category Consolidated balance sheet amount Fair value Valuation gains (losses) 1) Government / municipal bonds 2) Corporate bonds (4) 3) Other Total (4) Current fiscal year (As of March 31, 2018) (1) Securities whose market value exceeds the consolidated balance sheet amount Category Consolidated balance sheet amount Fair value Valuation gains (losses) 1) Government / municipal bonds 2) Corporate bonds 1,614 1, ) Other Total 1,614 1, (2) Securities whose market value is equal to or lower than the consolidated balance sheet amount Category Consolidated balance sheet amount Fair value Valuation gains (losses) 1) Government / municipal bonds 2) Corporate bonds (2) 3) Other Total (2) 2. Available-for-sale securities Previous fiscal year (As of March 31, 2017) (1) Securities whose consolidated balance sheet amount exceeds the acquisition cost Category Consolidated balance sheet amount Acquisition cost Valuation gains (losses) 1) Shares 24,488 9,541 14,947 2) Bonds 3,202 3, ) Other 2,380 2, Total 30,071 14,954 15,

120 SEGA SAMMY HOLDINGS Notes to Consolidated Financial Statements (2) Securities whose consolidated balance sheet amount is equal to or lower than the acquisition cost Category Consolidated balance sheet amount Acquisition cost Valuation gains (losses) 1) Shares 1,357 1,465 (107) 2) Bonds 4,489 4,551 (61) 3) Other 62,825 62,836 (10) Total 68,672 68,852 (180) Note: Compound financial instruments are included in Bonds and valuation difference of 520 million is recorded under Other income. Current fiscal year (As of March 31, 2018) (1) Securities whose consolidated balance sheet amount exceeds the acquisition cost Category Consolidated balance sheet amount Acquisition cost Valuation gains (losses) 1) Shares 23,009 9,596 13,413 2) Bonds 3,201 3, ) Other 2,945 2, Total 29,157 15,339 13,817 (2) Securities whose consolidated balance sheet amount is equal to or lower than the acquisition cost Category Consolidated balance sheet amount Acquisition cost Valuation gains (losses) 1) Shares (55) 2) Bonds 2,965 3,073 (107) 3) Other 19,499 19,499 Total 22,830 22,993 (163) Note: Compound financial instruments are included in Bonds and valuation difference of 52 million is recorded under Other income. 3. Available-for-sale securities sold during the fiscal year Previous fiscal year (As of March 31, 2017) Category Amount of proceeds Total gains on sales Total losses on sales 1) Shares 3,057 1, ) Bonds 400 3) Other Total 3,688 1, Current fiscal year (As of March 31, 2018) Category Amount of proceeds Total gains on sales Total losses on sales 1) Shares 1, ) Bonds 3) Other Total 2, Impairment loss on securities Previous fiscal year (From April 1, 2016 to March 31, 2017) During the fiscal year ended March 31, 2017, the Group recognized impairment loss on available-for-sale securities in an amount of 1,105 million. Current fiscal year (From April 1, 2017 to March 31, 2018) During the fiscal year ended March 31, 2018, the Group recognized impairment loss on available-for-sale securities in an amount of 142 million. 118

121 INTEGRATED REPORT Derivative Transactions 1. Derivative transactions to which hedge accounting is not applied (1) Currency-related derivatives Previous fiscal year (As of March 31, 2017) Category Contract value Contract value due after one year Fair value Unrealized gains (losses) T ransactions other than market transactions Forward exchange contracts: Selling U.S. dollar 79 (4) (4) Euro Total 93 (4) (4) Note: Fair values are calculated using prices quoted by financial institutions. Current fiscal year (As of March 31, 2018) Not applicable. (2) Compound financial instruments With respect to compound financial instruments whose fair values cannot be categorized and measured for each embedded derivative, the entire compound financial instruments are appraised by fair value, and are included in 2. Available-for-sale securities in Note 12, Investment Securities. 2. Derivative transactions to which hedge accounting is applied (1) Currency-related derivatives Previous fiscal year (As of March 31, 2017) Hedge accounting method Classification Major hedged items Contract value P ayables translated using forward exchange contract rates Contract value due after one year Fair value Forward exchange contracts: Buying U.S. dollar Accounts payable trade 133 Note Note: With respect to forward exchange contracts whose exchange rates are used for translating foreign currency-denominated accounts payable-trade, fair values of forward exchange contracts are included in the fair values of the relevant accounts payable-trade, since they are used for recording accounts payable-trade as hedged items. Current fiscal year (As of March 31, 2018) Hedge accounting method Classification Major hedged items Contract value Primary method Note: Fair values are calculated using prices quoted by financial institutions. Contract value due after one year Fair value Forward exchange contracts: Buying U.S. dollar Accounts payable trade 202 (0) (2) Interest rate-related derivatives Previous fiscal year (As of March 31, 2017) Hedge accounting method Classification Major hedged items Contract value Contract value due after one year Primary method (Note 2) Interest rate swaps: Floating rate into fixed rate Long-term loans payable 18,564 18,555 (71) S pecial treatment for interest rate swaps Interest rate swaps: Floating rate into fixed rate Long-term loans payable 33,000 30,000 Note 3 S pecial treatment for interest rate and currency swaps Interest rate and currency swaps: Floating rate into fixed rate Long-term loans payable Note 3 Total 52,553 49,544 Notes: 1. Fair values are calculated using prices quoted by financial institutions. 2. Derivatives for which primary method is applied are interest rate swaps to hedge interest rate risk on long-term loans payable of the companies accounted for under equity method. The contract value and fair value are calculated by multiplying the company s holding ratio. 3. With respect to interest rate swaps and interest rate and currency swaps which meet certain conditions, fair values of the interest rate swaps and currency swaps are included in the fair values of the relevant long-term loans payable, since they are used for recording long-term loans payable as hedged items. Fair value 119

122 SEGA SAMMY HOLDINGS Notes to Consolidated Financial Statements Current fiscal year (As of March 31, 2018) Hedge accounting method Classification Major hedged items Contract value Primary method (Note 2) S pecial treatment for interest rate swaps S pecial treatment for interest rate and currency swaps Contract value due after one year Fair value Interest rate swaps: Floating rate into fixed rate Long-term loans payable 20,196 20, Interest rate swaps: Floating rate into fixed rate Long-term loans payable 30,000 21,660 Note 3 Interest rate and currency swaps: Floating rate into fixed rate Long-term loans payable 988 Note 3 Total 51,184 41,856 Notes: 1. Fair values are calculated using prices quoted by financial institutions. 2. Derivatives for which primary method is applied are interest rate swaps to hedge interest rate risk on long-term loans payable of the companies accounted for under equity method. The contract value and fair value are calculated by multiplying the company s holding ratio. 3. With respect to interest rate swaps and interest rate and currency swaps which meet certain conditions, fair values of the interest rate swaps and currency swaps are included in the fair values of the relevant long-term loans payable, since they are used for recording long-term loans payable as hedged items. 14 Retirement Benefits 1. Overview of retirement benefit plans The Company and domestic consolidated subsidiaries offer, based on retirement benefit regulations, employees pension plans and lump-sum retirement benefit plans. Certain domestic consolidated subsidiaries and overseas consolidated subsidiaries offer defined contribution pension plans. Under the lump-sum retirement benefit plans that the Company and certain domestic consolidated subsidiaries have, net defined benefit liability and severance and retirement benefit expenses are calculated by the simplified method. Regarding The Pension Fund of Japan Electronics Information Technology Industry which the Company and some consolidated subsidiaries are members of, a representatives meeting held on December 5, 2017 resolved to dissolve the said Fund, and the Minister of Health, Labour and Welfare approved of the dissolution on March 31, Regarding the regulatory revision of the defined benefit pension plan that will be the succeeding plan for the Company and one of the consolidated subsidiaries after the dissolution of the said Fund, an agreement has been reached between the management and the employees on January 23, Defined benefit pension plan (1) Reconciliation of the difference between the amounts of projected benefit obligations (excluding pension plan using the simplified method) Projected benefit obligations at the beginning of the period 22,506 23,845 Service costs benefits earned during the year 1,862 1,910 Interest cost on projected benefit obligations Actuarial differences accrued Retirement benefit paid (684) (401) Prior service costs incurred (67) Increased liability following transition of retirement benefit plan 564 Impact of the change from the simplified method to the principle method 91 Other Projected benefit obligations at the end of the period 23,845 27,

123 INTEGRATED REPORT 2018 (2) Reconciliation of the difference between the amounts of plan assets Plan assets at the beginning of the period 19,211 22,030 Expected return on plan assets Actuarial differences accrued (275) 84 Contribution of employer 3,277 3,396 Retirement benefit paid (528) (346) Estimated amount of distribution from fund following transition of retirement benefit plan 408 Impact of the change from the simplified method to the principle method 6 Other (26) Plan assets at the end of the period 22,030 26,002 (3) Reconciliation of the difference between the amounts of net defined benefit liability under pension plans using the simplified method Net defined benefit liability at the beginning of the period Retirement benefit expenses Retirement benefit paid (79) (70) Impact of the change from the simplified method to the principle method (85) Other 3 (8) Net defined benefit liability at the end of the period (4) Reconciliation of the difference between the amount of projected benefit obligations and plan assets and net defined benefit liability and net defined benefit asset recorded in the consolidated balance sheets Funded projected benefit obligations 23,845 25,340 Plan assets (22,030) (26,002) 1,815 (662) Unfunded projected benefit obligations 659 2,326 Net amount of liabilities and assets recorded on the consolidated balance sheets 2,474 1,663 Net defined benefit liability 3,303 3,572 Net defined benefit asset (828) (1,908) Net amount of liabilities and assets recorded on the consolidated balance sheets 2,474 1,663 Note: The retirement benefit scheme applying the simplified method is included. (5) Breakdown of retirement benefit expenses Service costs benefits earned during the year 1,862 1,910 Interest cost on projected benefit obligations Expected return on plan assets (370) (423) Amortization of actuarial difference 185 (311) Amortization of prior service cost (67) Retirement benefit expenses using the simplified method Other 6 6 Retirement benefit expenses of defined benefit pension plan 1,885 1,332 Note: Other than the retirement benefit expenses stated above, early extra retirement payments of 149 million and 22 million were recorded under other expenses for the years ended March 31, 2017 and 2018, respectively. Additionally, losses arising from the dissolution of employees pension fund and a transfer of retirement benefit plan have been recorded as other expenses. The recorded amount was 156 million for the current fiscal year. 121

124 SEGA SAMMY HOLDINGS Notes to Consolidated Financial Statements (6) Remeasurements of defined benefit plans, net of tax Items included in the remeasurements of defined benefit plans are as follows (before tax effect deduction) Actuarial difference (137) (1,176) Total (137) (1,176) (7) Remeasurements of defined benefit plans Items included in the remeasurements of defined benefit plans are as follows (before tax effect deduction) Unrecognized actuarial differences 964 (211) Total 964 (211) (8) Matters concerning plan assets 1) Breakdown of plan assets Ratio of main classes of plan assets Debt securities 59% 56% Share of stock Cash and deposits 7 6 General account Other 7 6 Total ) Long-term expected rate of return on plan assets In determining long-term expected rate of return on plan assets, the Company and its consolidated subsidiaries consider the current and projected asset allocations, as well as current and future long-term rate of returns for the various assets which make up the plan assets. (9) Matters concerning basis for the actuarial calculation Basis for the actuarial calculation Discount rate % % Long-term expected rate of return on plan assets % % Salary increase ratio (Note) Note: Some consolidated subsidiaries do not use salary increase ratio for the calculation of retirement benefits obligations. Principally, salary increase index by ages as of March 31, 2012 is used. Principally, salary increase index by ages as of March 31, 2016 is used. 3. Defined contribution pension plans The amount to be paid by consolidated subsidiaries to the defined contribution pension plans were 288 million and 332 million for the years ended March 31, 2017 and 2018, respectively. 122

125 INTEGRATED REPORT Stock Option Plan 1. Contents, scale and movement of stock options Previous fiscal year (From April 1, 2016 to March 31, 2017) (1) The following table summarizes the contents of stock options as of March 31, Company name The Company The Company The Company Date of the resolution July 31, 2012 July 31, 2012 August 2, 2016 Position and number of grantees The Company s directors: 5 The Company s executive officers: 6 The Company s employees: 11 The Company s subsidiaries directors: 27 The Company s subsidiaries executive officers: 17 The Company s subsidiaries employees: 1,206 The Company s directors: 5 Class and number of stock Common stock 250,000 Common stock 3,483,000 Common stock 250,000 Date of issue September 1, 2012 September 1, 2012 September 1, 2016 Condition of settlement of rights Period grantees provide service in return for stock options Period subscription rights are to be exercised Continue to work from September 1, 2012 to September 1, 2014 September 1, 2012 to September 1, 2014 September 2, 2014 to September 1, 2016 Continue to work from September 1, 2012 to September 1, 2014 September 1, 2012 to September 1, 2014 September 2, 2014 to September 1, 2016 Continue to work from September 1, 2016 to September 1, 2018 September 1, 2016 to September 1, 2018 September 2, 2018 to September 1, 2020 Company name The Company Butterfly Corporation Butterfly Corporation Date of the resolution August 2, 2016 October 29, 2010 January 19, 2011 Position and number of grantees The Company s executive officers: 7 The Company s employees: 11 The Company s subsidiaries directors: 43 The Company s subsidiaries executive officers: 46 The Company s subsidiaries employees: 822 Butterfly Corporation s directors: 3 Butterfly Corporation s corporate auditors: 1 Butterfly Corporation s employees: 56 Butterfly Corporation s employees: 10 Class and number of stock Common stock 3,844,500 Common stock 49,000 Common stock 1,000 Date of issue September 1, 2016 November 1, 2010 February 1, 2011 Condition of settlement of rights Period grantees provide service in return for stock options Period subscription rights are to be exercised Continue to work from September 1, 2016 to September 1, 2018 September 1, 2016 to September 1, 2018 September 2, 2018 to September 1, 2020 Continue to work from November 1, 2010 to October 29, 2012 November 1, 2010 to October 29, 2012 October 30, 2012 to October 28, 2020 Continue to work from February 1, 2011 to October 29, 2012 February 1, 2011 to October 29, 2012 October 30, 2012 to October 28,

126 SEGA SAMMY HOLDINGS Notes to Consolidated Financial Statements (2) The following table summarizes the scale and movement of stock as of March 31, Company name The Company The Company The Company The Company Butterfly Corporation Butterfly Corporation Date of the resolution July 31, 2012 July 31, 2012 August 2, 2016 August 2, 2016 October 29, 2010 January 19, 2011 Not exercisable stock options Stock options outstanding at April 1, 2016 Stock options granted 250,000 3,844,500 Forfeitures 24,500 Conversion to exercisable stock options Stock options outstanding at March 31, ,000 3,820,000 Exercisable stock options Stock options outstanding at April 1, ,000 3,288,500 7, Conversion from not exercisable stock options Stock options exercised Forfeitures 180,000 3,288,500 7, Stock options outstanding at March 31, 2017 Shares The following table summarizes the price information of stock options as of March 31, Company name The Company The Company The Company The Company Butterfly Corporation Butterfly Corporation Date of the resolution July 31, 2012 July 31, 2012 August 2, 2016 August 2, 2016 October 29, 2010 January 19, 2011 Exercise price 1,686 1,686 1,413 1,413 2,000 2,000 Average market price of the stock at the time of exercise Fair value of the stock option at the date of grant Yen 124

127 INTEGRATED REPORT 2018 Current fiscal year (From April 1, 2017 to March 31, 2018) (1) The following table summarizes the contents of stock options as of March 31, Company name The Company The Company Date of the resolution August 2, 2016 August 2, 2016 Position and number of grantees The Company s directors: 5 The Company s executive officers: 7 The Company s employees: 11 The Company s subsidiaries directors: 43 The Company s subsidiaries executive officers: 46 The Company s subsidiaries employees: 822 Class and number of stock Common stock 250,000 Common stock 3,844,500 Date of issue September 1, 2016 September 1, 2016 Condition of settlement of rights Period grantees provide service in return for stock options Period subscription rights are to be exercised Continue to work from September 1, 2016 to September 1, 2018 September 1, 2016 to September 1, 2018 September 2, 2018 to September 1, 2020 Continue to work from September 1, 2016 to September 1, 2018 September 1, 2016 to September 1, 2018 September 2, 2018 to September 1, 2020 (2) The following table summarizes the scale and movement of stock as of March 31, Company name The Company The Company Shares Date of the resolution August 2, 2016 August 2, 2016 Not exercisable stock options Stock options outstanding at April 1, 2017 Stock options granted 250,000 3,820,000 Forfeitures 28,500 Conversion to exercisable stock options Stock options outstanding at March 31, ,000 3,791,500 Exercisable stock options Stock options outstanding at April 1, 2017 Conversion from not exercisable stock options Stock options exercised Forfeitures Stock options outstanding at March 31,

128 SEGA SAMMY HOLDINGS Notes to Consolidated Financial Statements The following table summarizes the price information of stock options as of March 31, Company name The Company The Company Date of the resolution August 2, 2016 August 2, 2016 Exercise price 1,413 1,413 Average market price of the stock at the time of exercise Fair value of the stock option at the date of grant Yen 2. Estimation of fair value of the stock options Previous fiscal year (From April 1, 2016 to March 31, 2017) Method to estimate the fair value of stock option granted by the Company (1) Measurement technique used Black-Scholes model (2) Major assumption used and method to estimate the assumption (i) Stock price volatility Stock option granted on September 1, 2016 (For directors of the Company) % Stock option granted on September 1, 2016 (For other than directors of the Company) % (ii) Remaining period assumed 3 years Since there is not enough data to make reasonable assumptions, the remaining period is estimated based on an assumption that the option would be exercised at the mid-point of exercise periods. (iii) Dividends assumed Stock option granted on September 1, 2016 (For directors of the Company) 40 yen/share Stock option granted on September 1, 2016 (For other than directors of the Company) 40 yen/share (iv) Risk-free interest rate Stock option granted on September 1, 2016 (For directors of the Company) (0.194)% Stock option granted on September 1, 2016 (For other than directors of the Company) (0.194)% Interest rates of Japanese government bonds for the assumed remaining period are used. Current fiscal year (From April 1, 2017 to March 31, 2018) Not applicable 3. Estimation of number of exercisable stock options Only the actual forfeitures are reflected because it is difficult to estimate future forfeitures reasonably. 126

129 INTEGRATED REPORT Income Taxes 1. Significant components of deferred tax assets and liabilities Deferred tax assets: Allowance for doubtful accounts 1, Loss on valuation of inventories 1,903 1,436 Provision for bonuses 1,996 1,845 Net defined benefit liability 1,666 1,431 Depreciation expense 14,120 15,627 Loss on valuation of investment securities Impairment loss 2,796 2,768 Other 11,807 10,112 Tax loss carryforward 67,507 49,987 Total 103,920 84,055 Valuation allowance (90,215) (71,427) Offset against deferred tax liabilities (6,241) (6,196) Net deferred tax assets 7,464 6,431 Deferred tax liabilities: Valuation difference on available-for-sale securities (5,105) (4,799) Other (4,366) (4,057) Subtotal of deferred tax liabilities (9,472) (8,857) Offset against deferred tax assets 6,241 6,331 Total (3,231) (2,525) Recorded deferred tax assets 4,232 3, Breakdown of major causes of the significant difference between the statutory tax rate and the effective tax rate for financial statement purposes, if any, by item, for the fiscal years ended March 31, 2017 and Statutory tax rate 30.9% 30.9% (Reconciliation) Changes in valuation allowance (4.2) (129.6) Permanently non-deductible expenses including entertainment expenses Amortization of goodwill Difference of tax rates for consolidated subsidiaries (1.0) 1.6 Tax credit for experiment and research expenses (4.4) (14.5) Tax loss carryforward (1.4) 67.1 Effect of adjustment for consolidation (4.7) 4.1 Adjustments of deferred tax assets for enacted changes in tax laws and rates Reversal of revaluation reserve for land (4.5) Other 1.8 (3.0) Effective tax rate for financial statement purposes

130 SEGA SAMMY HOLDINGS Notes to Consolidated Financial Statements 17 Business Combination The information is omitted due to its insignificance. 18 Segment Information 1. Outline of reporting segments Reporting segments of the Group are the organizational units for which separated financial information is available, and on the basis of which the Board of Directors makes decision on the allocation of management resources and examines financial performance on a regular basis. Planning of business development and strategies as well as execution of business activities in respect of each product and service is carried out by each Group company that provides such product and service. As such, the Group comprises segments classified by product and service provided through the business run by each company, in which the Pachislot and Pachinko Machine Business, the Entertainment Contents Business and the Resort Business are the reporting segments. Line of business at each reporting segment is as follows: Segment Pachislot and Pachinko Machine Business Entertainment Contents Business Resort Business Main product and business Development, manufacture and sales of pachislot and pachinko machines Development and sales of digital game software serving as the main axis of segments; development and sales of packaged game software and amusement machines; development and operation of amusement centers; planning, production and sales of animated films; development, manufacture and sales of toys Development and operation of hotels and golf courses, etc. in the integrated resorts business and other facilities businesses 2. Basis of measurement for net sales, income (loss), assets and other items by each reporting segment The accounting treatment for the Group s reporting segments is generally the same as described in Note 2 Summary of Significant Accounting Policies. (Impact of the change of the useful lives of the noncurrent assets) As described in Note 5 - Additional Information, at the end of the previous fiscal year, the Company and some of the companies of the SEGA SAMMY Group located in the Tokyo metropolitan area had shortened the useful lives of the noncurrent assets that will become unable to use as a result of the relocation, and the effects of this change are accounted for prospectively. Comparing the result with the previous method, segment income for Pachislot and Pachinko Machines Business decreased by 571 million, Entertainment Contents Business decreased by 1,102 million, respectively, for the fiscal year ended March 31, In addition, general corporate expenses included in Adjustment increased by 142 million. 128

131 INTEGRATED REPORT Information on the amounts of net sales, income (loss), assets and other items by each reporting segment Previous fiscal year (From April 1, 2016 to March 31, 2017) Net sales: Pachislot Pachinko Reporting segment Entertainment Contents Resort Subtotal Adjustment (Note) Amount in consolidated financial statements Sales to third parties 148, ,704 13, , ,939 Inter-segment sales and transfers 752 1, ,953 (1,953) Total 148, ,857 13, ,892 (1,952) 366,939 Segment income (loss) 26,331 11,176 (2,244) 35,263 (5,735) 29,527 Segment assets 117, ,845 48, , , ,599 Other items: Depreciation 7,600 11,177 1,162 19, ,561 Investments in affiliates accounted for by the equity method 337 1,359 21,274 22, ,866 Increases in property, plant and equipment and intangible assets 5,871 16,667 4,505 27, ,063 Notes: 1. Elimination of inter-segment transactions of 7 million and general corporate expenses of (5,742) million which are not allocated to the reporting segment are included in the adjustment to segment income (loss) of (5,735) million. General corporate expenses are mainly expenses of the Group management incurred by the Company. 2. Adjustments for segment assets of 184,999 million includes elimination of inter-segment transactions of (99,861) million and general corporate assets of 284,861 million which are not allocated to each reporting segment. General corporate assets are mainly assets of the Company that are not allocated to each segment. 3. The adjustment to depreciation is mainly depreciation associated with the Company. 4. Adjustments for investments in affiliates accounted for using the equity method are investments in affiliates accounted for using the equity method that are not attached to each reporting segment. 5. The adjustment to property, plant and equipment and intangible assets is mainly the purchase of noncurrent assets associated with the Company. 6. Adjustment has been made to segment income (loss) and operating income in the consolidated financial statements. Current fiscal year (From April 1, 2017 to March 31, 2018) Net sales: Pachislot Pachinko Reporting segment Entertainment Contents Resort Subtotal Adjustment (Note) Amount in consolidated financial statements Sales to third parties 105, ,081 9, , ,664 Inter-segment sales and transfers 759 1, ,263 (2,263) Total 106, ,563 9, ,927 (2,262) 323,664 Segment income (loss) 11,923 14,841 (2,502) 24,262 (6,541) 17,720 Segment assets 84, ,135 53, , , ,505 Other items: Depreciation 6,233 11,168 1,026 18, ,180 Investments in affiliates accounted for by the equity method ,973 27, ,848 Increases in property, plant and equipment and intangible assets 3,656 17,254 1,961 22,873 1,323 24,196 Notes: 1. Elimination of inter-segment transactions of 18 million and general corporate expenses of (6,560) million which are not allocated to the reporting segment are included in the adjustment to segment income (loss) of (6,541) million. General corporate expenses are mainly expenses of the Group management incurred by the Company. 2. Adjustments for segment assets of 168,866 million includes elimination of inter-segment transactions of (16,815) million and general corporate assets of 185,682 million which are not allocated to each reporting segment. General corporate assets are mainly assets of the Company that are not allocated to each segment. 3. The adjustment to depreciation is mainly depreciation associated with the Company. 4. Adjustments for investments in affiliates accounted for using the equity method are investments in affiliates accounted for using the equity method that are not attached to each reporting segment. 5. The adjustment to property, plant and equipment and intangible assets is mainly the purchase of noncurrent assets associated with the Company. 6. Adjustment has been made to segment income (loss) and operating income in the consolidated financial statements. 129

132 SEGA SAMMY HOLDINGS Notes to Consolidated Financial Statements [Related information] Previous fiscal year (From April 1, 2016 to March 31, 2017) 1. Information by each product and service Nothing is stated herein as similar information is disclosed in Segment Information. 2. Geographical segment information (1) Net sales Japan North America Europe Other Total 325,393 23,894 7,136 10, ,939 Note: Net sales are geographically classified by country or region in which customers are located. (2) Property, plant and equipment Japan Korea Other Total 78, ,001 81,609 Note: Property, plant and equipment are geographically classified by country or region in which customers are located. 3. Information by each major customer Nothing is stated herein as there is no outside customer representing 10% or more of the net sales in the consolidated statements of income and comprehensive income. Current fiscal year (From April 1, 2017 to March 31, 2018) 1. Information by each product and service Nothing is stated herein as similar information is disclosed in Segment Information. 2. Geographical segment information (1) Net sales Japan North America Europe Other Total 267,992 34,608 10,236 10, ,664 Note: Net sales are geographically classified by country or region in which customers are located. (2) Property, plant and equipment Description is omitted, since property, plant and equipment in Japan exceeded 90% of those stated in the consolidated balance sheets. 3. Information by each major customer Nothing is stated herein as there is no outside customer representing 10% or more of the net sales in the consolidated statements of income and comprehensive income. 130

133 INTEGRATED REPORT 2018 [Information on the amount of impairment loss on noncurrent assets by each reporting segment] Previous fiscal year (From April 1, 2016 to March 31, 2017) Pachislot Pachinko Reporting segment Entertainment Contents Resort Subtotal Adjustment (Note) Amount in consolidated financial statements Impairment loss 134 1,106 4,794 6,034 6,034 Current fiscal year (From April 1, 2017 to March 31, 2018) Pachislot Pachinko Reporting segment Entertainment Contents Resort Subtotal Adjustment (Note) Amount in consolidated financial statements Impairment loss 270 2,203 2,474 2,474 [Information on amortization of goodwill and unamortized balance by each reporting segment] Previous fiscal year (From April 1, 2016 to March 31, 2017) Pachislot Pachinko Reporting segment Entertainment Contents Resort Subtotal Adjustment (Note) Amount in consolidated financial statements Amortization 196 2, ,456 2,456 Balance as of March 31, ,789 10,807 10,807 Current fiscal year (From April 1, 2017 to March 31, 2018) Pachislot Pachinko Reporting segment Entertainment Contents Subtotal Adjustment (Note) Amount in consolidated financial statements Amortization 43 2,126 2,169 2,169 Balance as of March 31, ,541 8,541 8,541 Resort [Information on gain on negative goodwill by each reporting segment] Previous fiscal year (From April 1, 2016 to March 31, 2017) Not applicable Current fiscal year (From April 1, 2017 to March 31, 2018) Not applicable 19 Related-Party Transactions 1. Related-party transactions (1) Transactions between the Company and related parties 1) Non-consolidated subsidiaries and affiliated companies of the Company Previous fiscal year (From April 1, 2016 to March 31, 2017) Name of related individual or company Position and principal business Description of the Company s transactions PARADISE SEGASAMMY Co., Ltd. Transaction amount Accounts End of period account balance Resort business Provision of security (Note) 21,274 Note: For part of the loans from financial institutions to PARADISE SEGASAMMY Co., Ltd., the shares of the company were provided as a pledge. 131

134 SEGA SAMMY HOLDINGS Notes to Consolidated Financial Statements Current fiscal year (From April 1, 2017 to March 31, 2018) Name of related individual or company Position and principal business Description of the Company s transactions PARADISE SEGASAMMY Co., Ltd. Transaction amount Accounts End of period account balance Resort business Underwriting of capital increase (Note 1) 5,383 Notes: 1. The Company underwrote a capital increase through allotment to shareholders. 2. For part of the loans from financial institutions to PARADISE SEGASAMMY Co., Ltd., the shares of the company were provided as a pledge. Provision of security (Note 2) 25,973 2) Directors, key individual shareholders, etc., of the Company Previous fiscal year (From April 1, 2016 to March 31, 2017) Name of related individual or company Position and principal business Description of the Company s transactions Transaction amount Accounts End of period account balance FSC Co., Ltd. (Note 1) Non-life insurance agent Payment of insurance (Note 2) 8 Prepaid expenses 5 R ental income from real estate and equipment (Note 2) 3 Notes: 1. Hajime Satomi, Chairman of the Board and CEO and COO, and Haruki Satomi, Executive Vice President (Director of the Board), directly hold a majority of the shares of FSC Co., Ltd. 2. Transaction prices are determined in the same way as for general transactions and with reference to market prices. 3. Consumption taxes are not included in transaction amount. Current fiscal year (From April 1, 2017 to March 31, 2018) Name of related individual or company Position and principal business Description of the Company s transactions Transaction amount Accounts End of period account balance FSC Co., Ltd. (Note 1) Non-life insurance agent Payment of insurance (Note 2) 7 Prepaid expenses 3 Receipt of insurance monies (Note 2) 1 Long-term prepaid expenses 2 R ental income from real estate and equipment (Note 2) 3 Notes: 1. Hajime Satomi, Chairman and CEO (Representative Director), and Haruki Satomi, President and COO (Representative Director), directly hold a majority of the shares of FSC Co., Ltd. 2. Transaction prices are determined in the same way as for general transactions and with reference to market prices. 3. Consumption taxes are not included in transaction amount. (2) Transactions between subsidiaries of the Company and related parties Directors, key individual shareholders, etc., of the Company Previous fiscal year (From April 1, 2016 to March 31, 2017) Name of related individual or company Position and principal business Description of the Company s transactions Transaction amount Accounts End of period account balance FSC Co., Ltd. (Note 1) Non-life insurance agent Payment of insurance (Note 2) 35 Prepaid expenses 21 Notes: 1. Hajime Satomi, Chairman of the Board and CEO and COO, and Haruki Satomi, Executive Vice President (Director of the Board), directly hold a majority of the shares of FSC Co., Ltd. 2. Transaction prices are determined in the same way as for general transactions and with reference to market prices. 3. Consumption taxes are not included in transaction amount. Accrued expenses 1 Current fiscal year (From April 1, 2017 to March 31, 2018) Name of related individual or company Position and principal business Description of the Company s transactions Transaction amount Accounts End of period account balance FSC Co., Ltd. (Note 1) Non-life insurance agent Payment of insurance (Note 2) 28 Prepaid expenses 19 Notes: 1. Hajime Satomi, Chairman and CEO (Representative Director), and Haruki Satomi, President and COO (Representative Director), directly hold a majority of the shares of FSC Co., Ltd. 2. Transaction prices are determined in the same way as for general transactions and with reference to market prices. 3. Consumption taxes are not included in transaction amount. 132

135 INTEGRATED REPORT Notes on the parent company or significant affiliates (1) Information on the parent company Not applicable (2) Summarized financial information of significant affiliates PARADISE SEGASAMMY Co., Ltd. is a significant affiliates in the current fiscal year, and its summarized financial statements are as follows Total current assets 27,482 21,327 Total noncurrent assets 81, ,547 Total current liabilities 3,170 6,533 Total noncurrent liabilities 61,770 73,947 Total net assets 44,261 55,393 Net sales 9,061 19,948 Income (loss) before income taxes (417) (5,469) Income (loss) (413) (5,349) Note: PARADISE SEGASAMMY Co., Ltd. has become a significant affiliate from the current fiscal year due to an increase in its materiality. 20 Per Share Data Item Net assets per share 1, , Net income per share Net income per share (diluted) Yen The assumptions of net income (loss) per share and diluted net income per share are as follows. Item Net income per share: Profit attributable to owners of parent 27,607 million 8,930 million Amount not attributable to common stockholders million million Profit attributable to owners of parent for common stock 27,607 million 8,930 million Average number of common stocks 234,391 thousand shares 234,383 thousand shares Diluted net income per share: Profit attributable to owners of parent adjustment million million Increase of common stock 770 thousand shares 363 thousand shares (Stock options) 770 thousand shares 363 thousand shares 133

136 SEGA SAMMY HOLDINGS Notes to Consolidated Financial Statements 21 Significant Subsequent Events Dissolution and liquidation of specified subsidiary At the Board of Directors meeting held on April 6, 2018, the Company resolved to dissolve and liquidate a specified subsidiary SEGA SAMMY BUSAN INC., and completed all of the relevant procedures on July 12, (1) Reasons for dissolution At a meeting of the Board of Directors held on December 22, 2016, the Company resolved to discontinue its complex development project in Busan Metropolitan City, South Korea. Following the resolution, the Company reached an agreement with Busan Metropolitan City, South Korea on the return of acquired land. Since related procedures including the receipt of the land cost were completed in March 2018, the Company has determined to dissolve and liquidate the subsidiary. (2) Overview of the dissolution subsidiary 1) Name SEGA SAMMY BUSAN INC. 2) Head office 233, Jungang-daero, Dong-gu, Busan, Republic of Korea 3) Title and name of representative Naoya Tsurumi, President (Representative Director) 4) Capital 124,000 million KRW 5) Business description Development and operation of a complex comprised of hotel, entertainment facilities, commercial facilities, etc. 6) Major shareholders and ownership percentage SEGA SAMMY HOLDINGS INC % (including indirect ownership: 25%) (3) Schedule of dissolution and liquidation Resolution of dissolution of the subsidiary: April 6, 2018 Completion of liquidation: July 12, 2018 (4) Financial situation of the dissolution subsidiary (As of March 31, 2018) Total assets KRW94,431 million ( 9,452 million) Total liabilities KRW18,913 million ( 1,893 million) (5) Estimated amount of profit (loss) by this dissolution Said company began the procedures for dissolution and liquidation in accordance with local laws and regulations, and the Company received a distribution of residual assets from said company on July 12, Following said dissolution and liquidation, the Company is expecting to record a 1,220 million gain on liquidation of subsidiaries and affiliates as extraordinary income in the second quarter of the fiscal year ending March 31, (6) Significant impact from this dissolution on operating activities, etc. The impact from this dissolution and liquidation on operating activities, etc. is expected to be insignificant. 134

137 INTEGRATED REPORT Supplemental Information Supplemental schedule of corporate bonds Company name The Company SEGA Holdings Co., Ltd. Total Name of bond 1st unsecured bonds (Private placement bond) 2nd unsecured bonds (Private placement bond) 1st unsecured bonds (Publicly offered bonds) 3rd unsecured bonds (Publicly offered bonds) 3rd unsecured bonds (Private offered bonds) 4th unsecured bonds (Publicly offered bonds) Issuance date Balance as of April 1, 2017 () Balance as of March 31, 2018 () Interest rate (%) Type Date of maturity March 29, , Unsecured March 29, 2018 March 29, , Unsecured March 29, 2018 July 25, ,000 5,000 (5,000) 0.73 Unsecured July 25, 2018 June 17, ,000 10, Unsecured June 17, 2019 September 26, ,000 7,500 (5,000) 0.44 Unsecured September 26, 2019 June 15, ,000 10, Unsecured June 15, th unsecured bonds June 29, , Unsecured June 30, th unsecured bonds September 28, , Unsecured September 29, ,000 32,500 (10,000) Notes: 1. The figures in parentheses of the Balance as of March 31, 2018 represent the current portion of corporate bonds. 2. Total amount of scheduled redemption for each fiscal year within five years after March 31, 2018 is as follows: Within one year One to two years Two to three years Three to four years Four to five years 10,000 12,500 10,000 Supplemental schedule of borrowings Category Balance as of April 1, 2017 () Balance as of March 31, 2018 () Average interest rate (%) Repayment terms Short-term loans payable 0 Current portion of long-term loans payable due within one year 6,354 15, Current portion of lease obligations (Note 2) Long-term loans payable (Excluding current portion) 44,500 38, Lease obligations (Excluding current portion) (Note 2) Other interest-bearing debt: Accounts payable facilities Accounts payable facilities (Excluding current portion) Total 53,623 56,143 Notes: 1. Average interest rate represents weighted-average interest rate over the year-end balance of loans. 2. The average interest rate on lease obligations is not listed because lease obligations are posted on the consolidated balance sheets mainly as the amount before deduction of the amount of interest included in the total lease amount. 3. The redemption schedule of long-term loans payable, lease obligations and interest-bearing debt (excluding current portion) after March 31, 2018 is summarized as follows: Category One to two years Two to three years Three to four years Four to five years Over five years Long-term loans payable 13,341 13,320 10,000 2,000 Lease obligations Other interest-bearing debt: Accounts payable facilities

138 SEGA SAMMY HOLDINGS Independent Auditor s Report 136

139 SEGA SAMMY HOLDINGS INC. Sumitomo Fudosan Osaki Garden Tower, Nishi-Shinagawa, Shinagawa-ku, Tokyo , Japan Printed in Japan

140 SEGA SAMMY HOLDINGS Discussion Points The SEGA SAMMY Group endeavors to reflect the viewpoints of diverse stakeholders in management strategy by providing the Group s management team with feedback on the various requests and opinions received from shareholders, investors, and other stakeholders. These Discussion Points comprise excerpts from Integrated Report 2018 that are designed to providing the starting points of discussions as well as summarized information on market conditions and environmental, social, and governance factors that are intended to supplement the main report.

141 SEGA SAMMY HOLDINGS Overview of the SEGA SAMMY Group s Businesses The SEGA SAMMY Group offers moving experiences across a wide range of fields. Our businesses include the Pachislot and Pachinko Machines Business; the Entertainment Contents Business, comprising digital games, packaged games, amusement machines, amusement center operations, animation, and toys; and the Resort Business, focused on realizing successful integrated resorts. Pachislot and Pachinko Machines Business Pachislot machines Pachinko machines Contents for smartphones and PCs Entertainment Contents Business Digital games area Packaged games area Amusement machines sales area Amusement centers operetions area Animation and toys area Resort Business Hotels and golf courses Integrated resorts Detective Conan: Zero the Enforcer 2018 GOSHO AOYAMA/DETEC- TIVE CONAN COMMITTEE All Rights Reserved. Phoenix Resort SONIC FORCES SEGA Pachinko CR Shin Hokuto Muso Chapter 2 Buronson & Tetsuo Hara/ NSP 1983, Approved No.KOK Koei Tecmo Games Co., Ltd. Sammy Pachislot Hokuto No Ken Shindensetsu souzou Buronson & Tetsuo Hara/ NSP 1983, NSP 2007 Approved No.YBJ-918 Sammy UFO CATCHER TRIPLE SEGA ANPANMAN D.I.Y. Moving ANPANMANGO-CAR Takashi Yanase/ Froebel-kan,TMS,NTV PARADISE SEGASAMMY Co. Ltd., All rights reserved. Medium-to-Long-Term Performance Trends (Fiscal 2015 Fiscal 2019) Cost Structure Reform Business structure reform Return to earnings growth trend Effect of regulatory revision Growth due to introduction of No. 6 pachislot machines Net sales billion 8.0 Operating income margin 5.4% Operating income 21.0 billion (Plan) (FY) 1

142 INTEGRATED REPORT 2018 Road to 2020 provides a medium-term road map aimed at the realization of our long-term vision and covers fiscal 2018 through fiscal We are advancing measures that are based on Road to 2020 and which we have embedded into a mission pyramid that comprises the unchanging components of our DNA: a value, a mission (raison d être), a vision (ideal self), and a goal (specific target). Value (Mindset / DNA) Creation is Life Always Proactive, Always Pioneering Mission (Raison d être) Continuing to create moving experiences Making life more colorful Be a Game Changer Vision (Ideal self) Pachislot and Pachinko Machines Entertainment Contents Resort Be a Game Changer Sammy the wellspring of new ideas as an innovator in the industry Be a Game Changer Be an Experiential Innovator Goal (Specific target) Operating income margin: At least 15% ROA *1 : At least 5% Operating income margin: At least 30%* 2 Net sales: At least billion Operating income: At least 30.0 billion Operating income margin: At least 10% Succeed in IR businesses Enhance brand value *1 ROA = Profit attributable to owners of parent Total assets *2 Operating income margin of the Pachislot and Pachinko Machines Business excluding other and eliminations Review of fiscal 2018 based on Road to 2020 Billions of yen / % Pachislot and Pachinko Machines Business Responded to regulatory revision Advanced reuse Improved development efficiency Entertainment Contents Business Reorganized intellectual property studios Enhanced global rollouts Billions of yen / % Billions of yen Resort Business Opened PARADISE CITY Completed largest renewal of Phoenix Seagaia Resort since its opening Acquired gaming machine licenses in the U.S. State of Nevada (Plan) Net sales Operating income Operating income margin (FY) Although regulatory revision impacted results in fiscal 2018, in fiscal 2019 we aim to expand the business through the introduction of No. 6 pachislot machines (Plan) (FY) Net sales Operating income Operating income margin Earnings have been trending upward since structural reform. We aim to expand the business by marketing new digital game titles in fiscal (Plan) Net sales Operating loss We continued advance investment with a view to entering the integrated resort business in Japan. (FY) 2

143 SEGA SAMMY HOLDINGS Road to 2020 Business Strategies Pachislot and Pachinko Machines Business Business Strategy that Turns Change into Opportunities The regulatory revisions in February 2018 have broadened opportunities to tap into demand from people during their free time. In light of this, from the second half of fiscal 2019 through fiscal 2020, we plan to release a series of new pachislot machines (No. 6 machine models) that appeal to a broad base of customers. In pachinko machines, a major strength is our lineup of several models based on older reguration that have already been approved. In fiscal 2019, our sales strategy will focus on older models, starting with Pachinko CR Shin Hokuto Muso Chapter 2. While keeping an eye on trends in new models at other companies, we will continue to develop new-format machines with our sights set on a strategy for fiscal ZEEG, a Key Driver of Road to 2020 Reuse is key to achieving our targets under Road to 2020, and our central player in reuse is ZEEG Co., Ltd., a joint venture established between Sammy and Universal Entertainment Corporation. ZEEG is advancing efforts to generate significant synergies by improving product capabilities that combine the technologies of both companies, and by creating an efficient earnings structure by reducing procurement costs. For example, Universal Entertainment Corporation uses cabinets recovered from Sammy, expanding the scale of reuse beyond reuse on an individual company level. This will also lead to a significant reduction in procurement costs. We expect profits to improve (through the use of general-purpose cabinets) as more companies participate in this platform. ZEEG has also started to develop software development kit (ZSDK) with an eye on the future of the pachinko and pachislot machine industry. Pachinko CR Shin Hokuto Muso Chapter 2 Buronson & Tetsuo Hara/NSP 1983, Approved No.KOK Koei Tecmo Games Co., Ltd. Sammy ZEEG Reuse Flow Development and production at manufacturers Trade in by each company ZEEG s Area of Responsibility Sammy Universal Entertainment Other manufacturers Pachinko hall Sammy Universal Entertainment Other manufacturers Distribution centers of each company Component companies (Suppliers) Direct delivery Components supplied on a unit and machine cabinet basis ZSDK Initiative The ZSDK initiative aims to enable the reuse of software components in addition to hardware components by unifying software development tools and selling it as a package in the future. Utilizing ZEEG cabinets increases the reused component ratio and the ratio of cabinets used, thereby cutting purchase costs on an individual component basis 3